"The underlying economic fundamentals have totally disappointed expectations," says Van Hoisington, president of Hoisington Investment Management in Austin, Tex., and manager of the $50 million Wasatch-Hoisington U.S. Treasury fund.
Hoisington was referring specifically to labor-market conditions, which many economists and analysts believe will be the most important determinant of Fed policy in the months ahead, especially against the backdrop of an election year. In the past three months, the U.S. economy has created an average of just 42,000 new jobs a month, well below the 150,000 a month needed to absorb the natural expansion of the labor force.
Hoisington believes job growth will continue to be minimal and disinflation will persist, which will result in the Fed holding rates at four-decade lows for the next three years. "Circumstances are substantially worse today than they were coming out of the last recession" in the early 1990s, Hoisington says.
That makes 30-year Treasuries ideal. The 30-year bond ended the week at 4.717%, down from 4.665% on Thursday and 4.764% a week earlier. On the short end of the yield curve, the two-year note, the maturity most sensitive to Fed moves, settled at 1.515% Friday, down from 1.459% Thursday and 1.565% the preceding Friday.
"Any capital appreciation from these levels on two-year notes will be minimal, and you will make some money in the 10-year," Hoisington says. "Capital appreciation on the long end will be substantial." Hoisington wouldn't be surprised if long government-bond yields fall to 3.5% in the next year -- a level not seen since 1958.
That would be the result of continued weakening in consumer and labor-market conditions, says Hoisington. Already, he notes, in the most recent ABC News/Money Magazine poll, the consumer-comfort index fell two points to negative 18 for the week ended March 7 from negative 16 a week earlier -- the lowest level since Nov. 9. The index measures "typical" Americans' confidence in the national economy, their own finances and their willingness to spend money. "But it also reflects the increasing discussion of the lack of job growth and the duration of unemployment," says Hoisington.
"We aren't rooting for any of this," he quickly adds. "It's just facts," he says.
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