42 BARRON’S September 16, 2019
PRESIDENT TRUMP’S TUES-
day morning ultimatum
that the “boneheads” at
the Federal Reserve do
something to materialize
negativenominalinterest
rates again prompts the
question,“Wheredoesitallend?”Inmone-
tary debasement, a bond shakeout, and
higher gold prices, of course.
Yourcolumnisthasbeensayingthisfor
years.Butit’samuchmorestrikinglineof
argument when it runs out under the by-
lineofRickRieder,BlackRock’sfull-time
bond investor and part-time blogger.
InaSept.5post,Riederspeculateson
the “monetary endgame.” Inasmuch as a
bondisapromisetopaymoney,themone-
tary topic could hardly be weightier.
PhilippHildebrand,formerheadofthe
Swiss National Bank and a colleague of
Rieder’satBlackRock,scoopedtheRieder
messageinaSept.3op-edintheFinancial
Times. Come the next recession, Hilde-
brandproposes,letthemonetaryauthori-
ties directly infuse citizens with money,
rather than futilely continuing to whack
away at the stubble of the world’s bond
yields. Anyway, whatever the economic
merits of the Hildebrand plan, it sounds
like a vote-getter.
TakinguptheargumentonSept.5,Rie-
der,too,makesacasefortheefficacyofhe-
licopter money, the kind that enters the
paymentsstreamwithoutpassingthrough
thebanks.Figurativelyspeaking,itflutters
to earth from the doors of low-flying air-
craft—an image that Milton Friedman
dreamt up and that Ben S. Bernanke
alarminglyinvokedwhilehewasaFederal
Reserve governor. Competitive currency
devaluations, too, stand to figure in the
monetary grand finale, Rieder speculates.
Howtoinvestforthisendgame?“Asis
probablyevident,”theBlackRockchiefin-
vestment officer for global fixed income
leadsoff,“anynominalinstrumentwillbe
devaluedinrealterms,sothesolutionisto
hold an asset that maintains its real
value—anassetthatcannotbeprinted.We
would include stocks (dividend yields are
setonpayoutratios,companieshavesome
degree of pricing power, and shares out-
standing are limited in number), real es-
tate(itisdifficultandexpensivetoexpand
the stock of real estate), and even com-
moditycurrencieslikegold(again,limited
supply and expensive to extract).”
The worst asset to hold in this hypo-
theticalbonfireofthecurrencies?A“sov-
ereignbondwithanegativeyield,closely
followed by paper money at zero yield,
both with a theoretically infinite supply.”
Sosaysthemannearthetopofafirm
that,attheendofthesecondquarter,held
$2.19 trillion of fixed-income securities.
Have the clients heard?
You’ve heard allthe reasons put for-
wardtobuybonds,eventheonesyielding
less than zero. Plunging birth rates, bur-
densomedebts,dwindlingunionmember-
ship, perpetually subdued inflation, and
the price-chopping works of Jeff Bezos
constitute only the preface to the sales
pitch.It’sabullishnarrativeasdeeplyin-
grainedinthemarkettodayasthebearish
one was a generation ago.
Iholdinmyhandsarelicfromafateful
yearininterestrates.It’sananalysisbyJ.
ParkerHallIIIpublishedintheMay-June
1981 issue of the Financial Analysts Jour-
nal:“Shouldn’tYouOwnFewerLong-Term
Bonds?” is the wry, beckoning headline.
As every schoolgirl knows, 1981 was
the culmination of the post-World War II
bear bond market. Long-dated Treasury
yields peaked at 15%, up from the long-
forgotten 1946 low of slightly over 2%.
Inretrospect,youcanseethat1981was
to bonds what 1849 was to gold, but with
this difference: Whereas any California
forty-niner could comprehend a gold nug-
get, it took the likes of Hall to spot the
value in bonds. A longtime trustee of the
UniversityofChicagoandpresidentofLin-
coln Capital Management, Hall was Mid-
westerninvestmentroyalty.Hespokewith
authority,butittookallhispowersofper-
suasion to make the case for bonds, the
long-datedkind,noless,inthewakeofthe
inflation-seared 1970s.
“The1979-80bonddebacle,”Hallwrote
near the summit of the yield mountain,
“appearstohaverepresentedafinalcata-
clysmic adjustment, as 15 years of tradi-
tional hopes about future lower inflation
weredemolishedandreplacedbypresent
untraditionalfearsaboutfuturehigherin-
flation. For the first time in our history,
bond investors have given up.”
Hard-won investment experience had
taught them that, whatever they might
have learned in school, bonds made poor
portfolio diversifiers and were even more
susceptible than stocks to extreme price
volatility.Then,too,therewasnoreasonto
beartheriskoflong-durationassetswhen
theyyieldedlessthanTreasurybills.And
ifallthatweren’tenough,Hallhadtoadmit
that “owning bonds is embarrassing.”
Or had been embarrassing.Ininvest-
ing, the author wisely continued, “price is
nearlyeverything.”Compareandcontrast
the15%yieldtomaturityonseniorsecuri-
ties with the 4.5% dividend yield on com-
mon stocks.
Priceisnearlyeverything—andnearly
every financial phenomenon is cyclical.
Hallinvitedhisreaderstorecallthestock-
marketcollapseof1974,onlysevenyears
in the past. “But stocks still provided re-
turns of 18% compounded from 1975 to
’80,” he reminded them. In the previous
six years, bonds provided a compounded
annualrateofreturnofjust4%.“Isadif-
ferentialaslargeasthisagoodindication
of future normal comparative returns?”
Perhaps not even Hall envisioned the
fixed-incomefutureinallitssplendor.Bond
yields made their high around September
- In the 30 years until its maturity in
2011,thelong-datedTreasurygenerateda
compoundannualreturnof11%,edgingthe
S&P500totalreturn(includingreinvested
dividends) of 10.8% per annum.
Hall died in 2011, but I wonder what
theChicagograndee(anaccomplishedjazz
pianistandtennisplayer,ontopofevery-
thing else) would say now? I expect he
might warn against drawing a too facile
comparison between 1981 and 2019—be-
tweenaprovenhistoricalupsiderecordin
yields and what may or may not turn out
to be a reciprocal downside limit.
But his contrarian turn of mind might
leadhimtoobservethatthecentralbank-
ers might yet succeed in their quest to
stoke inflation, that the politicians are
promising the voters the sun, the moon,
andthestars,thatbondyieldstendtorise
and fall over multidecade intervals and
that$14.7trillionofbondsnowadaysyield
less than nothing. “Shouldn’t you own
fewerlongbonds”hemightask,thistime
really meaning it.
JAMESGRANT,founderandeditorofGrant’sIn-
terestRateObserver,istheauthorofBagehot:
The Life and Times of the Greatest Victorian,
which was published in July.
The 38-Year Case for Bonds
Yields on long and short-term bonds have steadily fallen after peaking in 1981.
Source: BloombergYields on long and short-term bonds have steadily fallen after peaking in 1981.
-2
0
2
4
6
8
10
12
14
16%
1985 ’90 ’95 2000 ’05 ’10 ’15 ’20
30-Year
3-Month
CURRENT YIELD n by James Grant
The Endgame for Bonds
Still-shrinking rates augur disaster for long Treasuries. Is 2019 Really 1981 in reverse?