Gary Shilling Projects a Total Return of 10% for Long-Term Treasuries

By on February 1, 2012

Gary Shilling - Age of DeleveragingIn the latest Forbes magazine Gary Shilling believes conditions are still supportive of falling interest rates, and therefore, rising prices for bonds. He predicts a total return of 10% for 30-year Treasuries in 2012.

According to Shilling he was calling for the bond rally of a lifetime back in 1981. Then yields were above a stunning 15% and he predicted they would eventually fall to 3%. For properly positioned investors the returns were remarkable:

Since then $100 invested in a 25-year zero, rolled over each year to maintain that maturity, leaped to $23,151. That’s 9.5 times the total return on the S&P 500 from its bottom in July 1982. Who would have ever believed that long Treasurys would become a ten-bagger versus stocks!

For the rally to continue the world economy will have to remain subdued. Shilling feels conditions are conducive to this scenario. He sees the Euro Zone entering a deep recession which he compares to the sub-prime crisis in 2008 as weak peripheral euro economies have already begun their collapse.

In addition to the European woes, Shilling forecasts continued slowing in China as they attempt to put the brakes on their inflation and property bubbles.

With the twin slowdowns in the huge economies of China and Europe continuing, Shilling sees demand for the US dollar and bonds reinforced because of their safe haven status.

Shilling also sees a trend with the fall of MF Global, which he believes could be the first of several financial institutions to collapse.

Shilling believes deflation is more likely than inflation under his dire scenario. This will result in 30 year Treasury yields falling to 2.5% from their current 3% and mark the end of the bond rally of a lifetime, in his view.

Gary Shilling is president of A. Gary Shilling & Co., editor of Gary Shilling’s Insights, and author of The Age of Deleveraging, Updated Edition: Investment Strategies for a Decade of Slow Growth and Deflation

Source: Forbes

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