Deflation Watch

Still Banking on Treasuries

Still Banking on Treasuries: Interview with Van Hoisington
Barron's Columnist Leslie P. Norton talks to Van Hoisington of Texas-based Hoisington Investment Management who believes the economy is heading for another recession—and that means the bull market in bonds isn't going anywhere.

Van Hoisington, President and Chief Investment Officer of Austin, Texas-based Hoisington Investment Management, cut his teeth in the bond bear market of 1978 to 1980. That was back when interest rates went from roughly 7% to 15%. Hoisington and the firm's economist, Lacy Hunt, are lucid exponents of the unpopular case that the three-decade-long bull market in Treasuries will continue, ratings agencies be damned. To learn Hoisington's reasoning, keep reading.

Barron's: Why only U.S. Treasuries?

Hoisington: When I first began in the business in 1974, at the Texas Commerce Bank, I had a portfolio of corporates and agencies. When interest rates go up, all assets go down. In his book Inside the Yield Curve, Marty Leibowitz of Salomon Brothers pointed out the power of maturity in terms of total returns. I just adapted the philosophy that you make more money by having the right maturity structure than you do worrying about foreign bonds, agencies and corporates. The problem is that when you are out in the very long end of the market, you have a great deal of price fluctuation, and many do not care for that volatility.

That's why we don't have $100 billion under management. The Wasatch-Hoisington U.S. Treasury fund itself is about $200 million, and we manage about $5.7 billion. [The fund is up 30% over the past 12 months.] It is all long-term bonds, the longest coupon and zero-coupon bonds. Philosophically, we are just as comfortable in very short-term maturities. In 1987, in our accounts, we went to 100% cash equivalents as a policy, and rates went from 7.5% to 10%. Since 1990, we've been long, because we've been in a disinflationary/deflationary cycle versus an inflationary circumstance. If we feel it is disinflationary, obviously there is no risk in 30-year Treasuries because the rates will gradually follow the inflation rate down.

Read the full article.

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