End of an era for this long-term bond bull as inflation takes hold and yields trend higher

By Jules Rimmer

Lacy Hunt makes U-turn on long-duration bonds

Quantitative tightening may increase the upward pressure on long-term rate markets

For more than three decades, Hoisington Investment Management and its chief economist Lacy Hunt have been bullish on bonds. But now their opinion has changed: Deglobalization, excess government debt and capital scarcity are all effecting a major increase in inflationary expectations and the chief casualty of these trends is U.S. Treasury bonds.

The well-known fixed-income strategist, 'Bond King' Jeffrey Gundlach, noted the surprising turn in direction from Hoisington, an investment management firm, responsible for $120 billion of assets. In a posting on X, Gundlach observed that the 30-year Treasury yield BX:TMUBMUSD30Y keeps bumping up near its two-decade high. "Seems unlikely to hold. Even Lacy Hunt has turned bearish, to his credit," wrote Gundlach.

The chief rationale behind the change in Hunt's mindset is the outlook for inflation. In Himco's just-published quarterly review and outlook, he writes that"the structural backdrop for U.S. inflation increasingly suggests that the long run equilibrium range is migrating from roughly 1.5-3.5% toward 3.5-4.5% with significant risk of episodes above 5%."

If inflation trends upward, it follows, writes Hunt, that long-term Treasury yields will also.

The principal cause of this is what Hunt euphemizes as "the steady erosion of the disinflationary architecture that dominated the 1990-2020 period." This is explained by deglobalization, a trend that seems to have begun in earnest around the time of the pandemic.

Before that, the fall of the Iron Curtain in 1989 and the entrance of China into the world economy provided a major supply shock that lowered labor costs, provided cheap goods, integrated supply chains and reinforced productivity growth.

Those days are past. Strategic rivalry with China for geopolitical supremacy, tariffs, friendshoring and semiconductor localization are creating new conditions for global trade and a shift in the supply model from "just in time" to "just in case." Moreover labor-supply growth is slowing as demographics deteriorate and capital requirements are rising primarily due to AI capex. Data centers, energy-grid expansion, electrification and defense manufacturing all require "massive investment spending."

Hunt predicts the productive capacity of the U.S. economy can no longer expand fast enough to absorb liquidity and credit growth without generating persistently higher inflation.

Federal debt is becoming too big relative to the size of the economy, according to Hoisington.

Hunt has long maintained that rising debt levels in the last several decades acted as a disinflationary force during the epoch of globalization.

Debt servicing diverted income from consumption and absorbed liquidity without generating pricing pressure. Now, Hunt perceives that as debt levels rise relative to the size of the economy and fiscal flexibility diminishes, investors may demand a higher risk premium on government bonds.

The benchmark 10-year Treasury BX:TMUBMUSD10Y ended Thursday with a yield of 4.57%, a gain of 41 basis points on the years. Yields move in the opposite direction to prices.

-Jules Rimmer

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07-17-26 0939ET