Legendary investor Lacy Hunt, who famously called the last bear bond market four decades ago during the Nixon era, says the latest Trump bond rout is just a bump on the way to a long term rally in the $13.9 trillion market. Hunt, who now manages $3.6 billion in assets, is long on bonds and says a key positive indicator is that the velocity of money in the economy has plunged to a record low, according to Bloomberg. This low velocity reduces the risk of inflation, which is good for bonds, he says (See also: Investor Warning: The Bond Rout May Not Be Over)

Hunt, now 74, became a legend in the industry in the late 1970s by making big profits for his clients by foreseeing the major selloff of bonds amid a period of rampant inflation during President Richard M. Nixon's Wage and Price controls, according to Bloomberg. Hunt seems just as insightful today. His $308 million U.S. Treasury portfolio at investment management firm Wasatch-Hoisington has returned nearly 2% this year, and has scored in the top decile among similar bond funds in three of the past five years, speaking to his bond prowess.

Bonds, Inflation, and Velocity of Money

Bond prices vary inversely with changes in interest rates, and interest rates tend to track general trends in inflation. Bond markets have sold off as the Trump win has led many investors to expect higher inflation thanks to pro-growth economic policies along with protectionist measures that have led to a strengthening dollar. Indeed, in December, the Fed raised rates and has signaled that it's ready to keep hiking rates. (For more, see: Trump Win Shocks Bond Market With $1 Trillion Loss Globally.)

Some, however, now see the bond rout as overdone. Yields on inflation-protected bonds, such as 10-year TIPS, have begun to signal a softening stance on future inflation, and Hunt points to a drop in the velocity of money as further evidence that inflation will remain subdued. The velocity of money is a measure of how many times a dollar changes hands within the economy over a period of time, with a greater velocity suggesting higher levels of economic activity and with it inflation. (See also: Fed Jitters: What's Driving the Treasuries Selloff.)

Hunt's view is contrarian in the sense that velocity isn’t a necessarily robust indicator. According to Bloomberg's January 18 story, "financial innovation, and the rise of shadow banking, have made it hard to measure exactly how much money is floating around in the financial system. And some would say that "money" itself is going through an identity crisis these days."

The Bottom Line

Lacy Hunt, famous for calling the last secular bear market in bonds forty years ago, is going long Treasuries as other portfolio managers see a bear market due to Trump's pro-growth inflationary policy proposals. Hunt points to the continued decline in the velocity of money as a technical indicator that inflation will nonetheless remain subdued, keeping interest rates low and bond prices high.

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