While the financial world seems focused on the management, mood swings and yoga routines of Californian Bill Gross at PIMCO, the smartest guys in the bond world work 1,400 miles to the east at Hoisington Capital Management in Austin, Texas.
Van Hoisington and economist Lacy Hunt manage about $4 billion almost exclusively in US Treasuries. And while they get little press, their long-term calls on the economy and interest rates are unparalleled.
Especially since what they’re saying now bucks 99 percent of the conventional wisdom on Wall Street. While nearly every bond and hedge fund has capitulated to the meme that interest rates are sure to ratchet higher as the Federal Reserve cuts back on its bond purchases, the Hoisington duo have stuck to their guns.
In a letter to investors this week, the two went out on a limb to say that Treasurys are still quite undervalued. That’s right. They believe that rates are heading lower still. If so, that has plenty of ramifications for the housing and stock markets and the economy overall.
The Hoisington premise is simple: The longtime historical tract of rates should run below the level of growth in the economy. Today, our economy is seeing GDP expansion of a mere 2.9 percent, while the rate Uncle Sam is getting for his 30-year IOUs is closer to 3.3 percent.
Hoisington and Hunt expect the US to settle into a rate-environment more in tune with other developed countries, saying, “We expect that US thirty-year bond yields could decline into the range of 1.7 to 2.3 percent, which is where the yields in the Japanese and German economies, respectively, currently stand.” That could mean long-term rates would be cut in half.
One thing’s certain, a further down draft in rates may spur a take-over binge on Wall Street as financing becomes even easier.
A return of merger-mania could raise the chorus of worrying about a bubble in stocks. Hoisington believes there is no bubble in bonds.