Is The 35-Year Bull Market In Bonds Dead? Why The 'Godfather Of Bonds' Gary Shilling Says No

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In 1981, economist Gary Shilling correctly predicted that the bond market was on the precipice of a "rally of a lifetime".

The 30-year Treasury bond yield was 15.2%. Today, it's 3%. His long bond has outperformed the S&P 500 by 5.5 times.

The bull market in bonds isn't dead, Shilling says. It's taken a brief hiatus as Wall Street celebrates the coronation of Donald Trump.

Even financial market legends, from Ray Dalio to Stan Druckenmiller, can't claim a market call that's played out precisely as predicted over the next three or four decades. Gary Shilling can claim exactly that.

Shilling is, of course, the President and Founder of institutional investor consultancy A. Gary Shilling, and the Godfather of the Long-Term Treasury Bond call.

In 1981, he proclaimed that the bond market was on the precipice of "the bond rally of a lifetime." That was a long time ago. Back then, Ronald Reagan was in the early innings of his first term. Paul Volcker was only two years into his war against rampant inflation. The 30-year Treasury bond yield was an unbelievable 15.2%. Today, it's 3%. Since Shilling's "rally of a lifetime" call, the long bond has outperformed the S&P 500 by 5.5 times.

Talk about beating your benchmark.


In this wide-ranging interview on HedgeyeTV, Shilling discusses what we're to make of the precipitous 26% rise in the 10-year Treasury yield, from 1.857% to today's 2.346%, following the Election Day victory of Donald Trump.

Shilling is dismissive of pumped up market expectations about a Trump presidency. He thinks Wall Street's excitement over proposed infrastructure spending will prove underwhelming. Shilling offers some amusing insight on the topic:

"If you look at the fiscal spending in 2009, part of that fiscal stimulus was infrastructure spending that was supposed to be shovel-ready projects. Well, it turned out they hadn't even made the shovels yet and they were probably going to be made in china. Two years afterward only 30% of that money had been allocated."

On long-term bonds, Shilling says the post-Election Day selloff has everything to do with Trump-inspired inflation expectations. He's skeptical about this too.

"I don't see inflation because there's too much supply in the world."

Ultimately, Shilling doesn't think bureaucrats can actually get the job done. Deflation will prove pervasive, he says, especially once the Trump expectations wear off.

Importantly, Shilling also thinks the Federal Reserve can't do much about this and won't be able to devalue the dollar and stimulate asset prices once again:

"When did these guys have that much power? They overrate their ability. Their forecasting has been absolutely atrocious. These guys think they have a lot more impact on not just the U.S. but the world than they actually do."

Shilling sees it all ending rather poorly.

Furthermore, the Fed has tacitly admitted that "monetary policy is impotent," Shilling says, since they've been "screaming for fiscal stimulus" for some time now. He thinks Yellen & Co. will implicitly encourage Donald Trump to run deficits by buying Treasuries to finance all the extra spending.

"That's called helicopter money," he says.


In other words, long-term bond yields go down once again. So no, the 40-year bond bull market isn't dead, Shilling says. It's taken a brief hiatus as Wall Street celebrates the coronation of Donald Trump.

But Shilling says this doesn't end well for bond bears. Since the 1980s, "Wall Street has been saying it's done with every backup in yields all the way down," Shilling says.

Time will tell, of course.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.