By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) — Two of the last Treasury bond bulls stood up the other day and made their best case for the worst case.
Market strategist David Rosenberg and economist Lacy Hunt — who both see 30-year Treasury yields diving to 2% as prices surge — addressed hedge-fund investors and money managers in separate sessions last week at the Altegris Strategic Investment Conference in Carlsbad, Calif.
Their message: Don’t hate the long bond because it’s beautiful.
“There are substantial capital gains in the long Treasurys,” Hunt said in an interview, “and even greater on zero-coupon Treasurys.”
“Bonds,” Rosenberg said, “are going to make very good sense. You can make a lot of money with the long bond at 2%.”
With the 30-year bond’s 30_YEAR +0.69% current yield at 3%, a drop to 2% would represent a steep rally in prices — in a market that most bond strategists think has already hit its high point.
Yield signs
Rosenberg, chief economist and strategist at wealth manager Gluskin Sheff + Associates in Toronto, has for several years contended that economic growth is limited at best in a world saddled with massive debt. In a so-called balance-sheet recession such as the U.S., Europe and Japan are experiencing, interest rates stay low and deflation, not inflation, is the biggest threat.
Income, not cash, is king, Rosenberg said. Like it or not, he argued, the reality for investors is that bonds of all stripes, especially Treasurys, are attractive for now, and probably for a long while.
“We are in an environment where preservation of capital and cash flow are paramount,” Rosenberg said in an interview.
Hunt is a disciplined U.S. market historian, drawing insightful parallels between the panic years of 2008 and 1838, for example. He’s the chief economist at Hoisington Investment Management Co., the Austin, Texas-based government-bond specialist that manages the Wasatch Hoisington U.S. Treasury Fund WHOSX -0.22% .
Hunt’s support for Treasurys is rooted in his belief that U.S. is in what he calls “debt disequilibrium.” Government borrowing and Federal Reserve monetary policy is quashing, not expanding, economic growth, he said. Instead, Hunt noted, too much of this debt is of poor quality: unproductive or worse, counterproductive.
“These types of lending activities are not going to generate future income, which we need to service the debt and repay the debt,” said Hunt, who said the U.S. economy can expect at least one quarter of negative growth this year. “To be effective, debt has to produce an income stream. Prosperity must come from rising levels of income.”
He said investors face an anemic economy, an aging population with greater needs, and a lack of political will in Washington to rein in government spending in an effort to restore prosperity.
