Lacy Hunt, chief economist at Hoisington Investment Management and known for his 44-year bullish stance on bonds, has significantly reversed his position, now anticipating a rise in long-term interest rates and persistent inflation. This unexpected shift, revealed at a recent Strategic Investment Conference, is attributed to two main factors: an oil price shock and what Hunt views as a problematic change in Federal Reserve policy initiated in mid-December. He believes the Fed's actions, including purchasing roughly $40 billion a month in Treasury bills, were not merely a technical fix for liquidity but actively reversed inflation-dampening elements.
Hunt's inflation outlook is stark, projecting a climb above 4%, with some periods potentially pushing towards 5% or even 5.5%. He draws a historical parallel to Arthur Burns' monetary easing during the 1973–74 oil shock, considering it a major policy error. In Hunt's current assessment, the Fed began easing conditions *before* the full impact of the recent oil shock was felt. He calculates that oil prices directly and indirectly account for approximately 12-15% of the Consumer Price Index (CPI), and if oil prices stabilize even 20% higher than pre-war levels, this alone could add 240-300 basis points to the price level.
The shift is particularly notable as Hunt's funds at Hoisington have been top performers for decades due to his bond-bullish stance, though this has faltered in recent years. Other financial figures, like Jeffrey Gundlach, have acknowledged Hunt's change of view, noting that even the generic 30-year US Treasury yield is now less than 10 basis points below a nearly two-decade high and seems unlikely to hold. This comes as rising real yields, which measure the difference between Treasury yields and inflation, suggest investors are demanding greater compensation for inflation risk, potentially pushing benchmark 10-year yields over 5% for the first time in nearly two decades.
