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Article quoting Lacy Hunt, Wall Street Journal, October 20, 2014

Rally in Treasuries Makes a Longstanding Bet Look Good

By Tom Lauricella

The roaring rally in government bonds has thrown Wall Street for a loop, but it comes as no
surprise to a group of veteran money managers in Austin, Texas. Van Hoisington, president of
Hoisington Investment Management Co., and
Lacy Hunt, its chief economist, have been wagering
for more than a decade that bond yields in the U.S. will fall, thanks to rising debt that they say
inhibits economic growth, retards inflation and pushes down interest rates.

In recent weeks, Hoisington, which manages $5.4 billion invested mostly in longterm U.S. Treasury
securities, has looked especially prescient, as the potential for economically damaging deflation in
Europe has become a serious concern for investors.

The yield on 10-year government bonds has tumbled below 1% in Germany for the first time ever
and below 2% in the U.S. for the first time in more than a year, a surprisingly low level at a time of
healthy employment gains in the U.S. Prices rise when yields fall.

While many fund managers and analysts have been predicting bond yields would move higher as
the U.S. economy picks up steam and the Federal Reserve prepares to wind down its bond-buying
stimulus program, Hoisington disagrees.
Mr. Hunt says the U.S. debt burden will continue to weigh
on rates for many years, pushing bond yields down, regardless of actions central bankers around
the globe might take to reflate economic growth.

“The Fed is out of the game,”
said Mr. Hunt, who started his career in 1969 at the Federal
Reserve Bank of Dallas. “I don’t think the Fed is going to raise rates. All they can do is hold rates
here for longer and longer time periods.”

In the stock market, those predicting doom and gloom for the global economy have —this past week’
s tumult notwithstanding—largely been wrong, and their investors have missed out on a five-year-
long bull market.

But it has been a different story for investors with Hoisington. The $239 million Wasatch-Hoisington
U.S. Treasury Fund is up 28% this year and an average of 5.9% for the last three years.

Over the last 15 years, the Hoisington fund is up an average of 8.9% a year, compared with a 5.7%
average annual return for the broad bond market, as measured by the Barclays U.S. Aggregate

Being bullish on Treasury bonds isn’t a new call; the firm has positioned its portfolio for falling
interest rates since the late 1990s.

Because Hoisington’s portfolio is loaded with long-term U.S. Treasury bonds highly sensitive to
changes in interest rates, losses can be substantial when the market goes against them. That
played out in 2013, when the yield on the 30-year bond jumped from 2.95% to just shy of 4%, and
the Wasatch-Hoisington U.S. Treasury Fund lost 16.7%. The Barclays U.S. Aggregate fell 2% in

Last year was not a good one, but we’ve more than compensated for it this year,” Mr.
Hunt says
. Hoisington’s shareholder letters are sprinkled with references to famed but longdead
economists such as Irving Fisher and Hyman Minsky. And the firm’s Treasury-bond strategy is
focused on trends likely to play out over years. The primary trend influencing the prospects for
global economic growth has been and will continue to be burdensome levels of private- and public-
sector debt, Mr.
Hunt says.

By his calculations, public and private debt is 330% of U.S. gross domestic product, 460% in
Europe and 650% in Japan. The danger zone for economies, he says, is in the 250%-to-275%
range. Since the financial crisis, emerging-market countries, too, have been adding debt. “The
world is more overindebted now than in 2008,” he said. The symptoms of this overindebtedness,
Mr. Hunt says, are subnormal growth, decelerating inflation and lower long-term interest rates.

Against this backdrop, unlike many bond investors, Mr. Hunt isn’t worried about the Federal
Reserve raising interest rates.

Monetary policy—even the unprecedented and aggressive stimulus efforts by the Fed and other
major central banks—is ineffective against economies burdened by too much debt, he says.
Meaningful changes to government spending and tax policies can be more effective,

he says, “but they require shared sacrifice and strong political will.” The result of the debt
overhang, he says, has been a U.S. economy stuck in slow-growth mode, with little wage inflation
and shrinking corporate profits.

Mr. Hunt predicts the yield on the U.S. Treasury 30-year bond ultimately will fall to below 2%, as
expectations for higher inflation vanish.

On Wednesday, the 30-year yield fell to its lowest point in more than two years, to 2.66%, before
bouncing to 2.95% late Friday. At the start of the year, the yield stood at nearly 4%. In fact, it isn’t
out of the question, Mr. Hunt says, that the yield on the Treasury bond will fall to 1.6% to 1.8%,
levels seen currently in long-term German and Japanese bonds.

Write to Tom Lauricella at