The bond market's long-standing bull run has finally met its match, as Hoisington Investment Management, a firm renowned for its decades-long bullish stance on Treasury bonds, has officially flipped bearish. This pivotal moment carries significant symbolic weight, given the firm's track record of accurately predicting the multi-decade decline in yields. The shift in sentiment is not just a change in strategy but a reflection of a broader structural backdrop that Hoisington's founder, Van Hoisington, and chief economist, Lacy Hunt, have identified as a catalyst for higher inflation and long-term yields.
In their latest quarterly investor letter, Hoisington's experts cited a combination of factors that have led to this bearish pivot. Firstly, they point to the persistent issue of larger fiscal deficits and the rising capital demands that accompany them. These structural deficits, they argue, are driving inflation higher and pushing long-term Treasury yields upward. The firm's outlook on inflation is particularly striking, with the long-run equilibrium range now projected to migrate towards 3.5% to 4.5%, carrying a significant risk of episodes above 5%. This outlook is well above the Federal Reserve's target and what markets have been pricing for years, indicating a potential for higher and more volatile inflation in the near future.
The firm's decision to cut its duration to almost nothing is a clear indicator of its bearish stance. Effective duration, a measure of the sensitivity of a portfolio to yield changes, has plummeted from nearly 21 years at the end of September to under one year by June 30. This dramatic reduction in duration suggests that Hoisington now sees limited near-term prospects for a yield decline, and it is positioning its portfolio accordingly.
The pivot began in the first quarter, triggered by the US attack on Iran in late February, which caused a surge in oil prices and stoked inflationary pressures. This event marked a turning point in the market, as Treasury yields climbed higher, with the 30-year yield reaching its highest level since 2007 in May. The 30-year yield has continued to test resistance just above 5%, and even DoubleLine's Jeffrey Gundlach believes it is unlikely to hold, further validating Hoisington's bearish view.
The firm's strategy of concentrating client assets in long-maturity and zero-coupon bonds has been a double-edged sword. While it made Hoisington a standout performer during rallies, it has also made the fund a heavy laggard during selloffs. The average annual return since inception stands at 5.38%, but the past five years have been a struggle, with annualized losses of 8.7%. As a result, assets under management have shrunk to under $2 billion from about $5 billion in 2020.
The broader capital spending boom, driven by companies borrowing heavily to fund artificial intelligence investment, is adding further pressure to bond markets already swollen by government deficit financing. This dynamic is creating a less stable interest-rate environment, as investors demand a higher risk premium on Treasuries. The steady yield decline seen from 1990 to 2020, which fueled a historic bond bull market, is now a thing of the past.
In conclusion, Hoisington Investment Management's bearish pivot is a significant development in the bond market, signaling a shift in sentiment and a potential for higher and more volatile inflation and yields. The firm's decision to cut its duration and its outlook on inflation and yields are clear indicators of its bearish stance, and it is positioning its portfolio accordingly. As the market continues to evolve, investors will be closely watching Hoisington's moves, as its bearish outlook could have broader implications for the fixed-income sector.
