Why Greenspan Is Wrong About Bonds
By Lisa Abramowicz Nov 8, 2016
GREENSPAN’S FORECAST FOR POTENTIAL YIELD ON 10-YEAR BONDS 5%
The longest-dated U.S. government bonds have fallen out of favor in recent weeks.
The debt just posted its biggest monthly loss in more than a year, with one Canadian company selling 90 percent of its longer-maturity Treasuries ahead of the U.S. presidential election. And on Monday, former Federal Reserve Chairman Alan Greenspan predicted that the bonds are poised for a significant selloff, with yields potentially doubling to historic levels of up to 5 percent.
The main argument is inflation. If consumer prices rise, investors will be less willing to accept such low returns to lend to the U.S. government. And the market certainly seems to think inflation is picking up a bit. You can see this looking at the big flows into inflation-protected bond funds and trading in derivatives contracts.
“We still believe the overall trend is toward lower interest rates,” said Hoisington, whose fund has returned an average 8.1 percent a year since its inception in 1986 and performed better than 99 percent of its peers over the past three years. “We continue to hold our long position.”
Even if inflation does pick up, it’s more likely to just eat into consumer budgets, preventing them from spending as much and adding to an economic slowdown, he added.
Jim Bianco of Bianco Research in Chicago has a similar view, saying last week that the next move in benchmark borrowing costs will probably be lower, not higher.
Regardless of the outcome of the election, it’s unclear what the government will be able to do to ignite more growth in the near term. When the smoke clears, investors will be faced with the same economic backdrop of slowing growth, an aging population and some big debts to pay. It’s difficult to see how this will lead to runaway inflation in the near term. It’s easier to see the path to low long-term rates for some time to come.