Look For Treasury Rally Repeat In 2012

Includes: BIL, TIP
by: Market Blog

Bulls on long-term U.S. Treasury bonds can rest easy. The securities, one of the star performers in 2011 with a rally of 35 per cent, are poised for another great year.

That's the opinion at Hoisington Investment Management Co., the unusually prescient bond investing shop based in Austin, Texas, that last year took the contrarian position that Treasuries would rally, bought a huge stash of the securities, and was vindicated.

In its latest quarterly outlook, Hoisington says the good times for Treasuries are going to continue because the U.S. economy is about to surprise people on the downside. The firm believes the country is on the cusp of another recession, which will cause investors to flee into super safe government bonds, driving up their prices.

Bonds move the opposite direction to interest rates, so the firm's call is really for the cost of money to fall. Long-term U.S. Treasuries currently yield just under 3 per cent, and while Hoisington wouldn't make a specific prediction on how low rates will get, it says they're going down.

In fact, Hoisington says this year is shaping up to be a repeat of the sunny times for Treasuries that occurred in 2011, when the consensus forecast early in the year was for the economy to strengthen and rates to rise.

"If recessionary conditions appear in 2012, as we expect, then even lower long-term interest rates will be recorded," the firm says.

While the current consensus is for moderate growth in the U.S. this year, Hoisington says there are adverse trends that will drag the country back into a downturn.

Among the problems is that governments at all levels are cutting spending, harming growth. Exports, one of the brightest spots in the U.S. economy, are slackening due to slower growth in Euro land and China. It's true consumers have been spending at a decent clip, but Hoisington says real incomes have stagnated, causing people to cut into savings to finance their shopping, a trend it believes will soon reverse.

Another negative is that capital spending by business is about to take a hit, due to changes in accounting rules. To spur companies to invest, the U.S. allowed accelerated depreciation of 100 per cent of spending, but the credit expired at the end of December. This year, the rate drops to 50 per cent.

Hoisington says the accounting incentive merely shifted economic activity into 2011, "adding to the recessionary woes of 2012."

Disclosure: None

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