The “bond rally of a lifetime” that he forecast 38 years ago remains intact, but “may draw to a close before long,” writes economist and money manager Gary Shilling in his latest market outlook.
Even then, says Shilling, Treasuries may still be attractive versus stocks on a yield basis. The 30-year Treasury bond, which Shilling favors along with its zero coupon 30-year version, is currently yielding 1.95%, about the same for the S&P 500 index, with far less risk.
Moreover, bond yields could fall further as the recession, which Shilling believes is already underway, deepens, the U.S.-China trade war escalates and “deflation unfolds.”
A decline in the 30-year Treasury yield from 2% to 1% would deliver a 27% total return following an almost equal decline over the past year, as the 30-year bond yield fell from 3% to 2%, hitting Shilling’s forecasted target.
The decline in bond yields during the past year “may not seem like much, but it created a total return of 25.5% for the 30-year coupon bond and 34.5% for the 30-year zero coupon issue,” writes Shilling. In contrast the S&P 500 has gained about 2% over the past year.
Shilling is not forecasting negative yields for U.S. Treasuries, as has been the case with many European government bond issues, but notes that such a development would deliver even greater gains in U.S. Treasuries.
“If a bond has a negative yield of, say 0.5%, it still appreciates if the yield drops to minus 1%.”