FORTUNE -- Guggenheim Partners chief investment officer Scott Minerd is a financial-history buff with a record of making dramatic predictions. In 2005 he warned clients of a looming cataclysm, and then was buying bonds again by October 2008. Those calls have helped the firm -- founded by the grandson of Solomon Guggenheim -- increase assets to $122 billion at the end of 2011, from $35 billion in 2007. Its fixed-income composite has returned an annualized 7.4% for the decade ended Dec. 31, ranking it in the top percentile of eVestment Alliance's U.S. core fixed income. Now Minerd, 53, says bonds are headed for a long-term bear market. He spoke with Fortune from his offices in Santa Monica about the economic outlook, where he's finding opportunities, and how his life has changed since a Guggenheim-led consortium reached a deal to buy the Los Angeles Dodgers. Edited excerpts:
You think a generational bear market for bonds is coming -- why?
We're coming out of a generational bull market, and I believe rates for Treasury securities have traded at their lows. Over the next three to five years, I expect rates to move up significantly [which means bond prices will drop]. The Fed's policy has been to maintain very low mortgage rates to help clear the inventory in the housing sector. We expect the overhang in housing to be cleaned up by 2015. At that point the Fed will realize that inflation is becoming a problem and will begin to raise rates, and that'll be the beginning of the generational bear market.
So we're not quite there yet, but moving toward it?
That's right. If you bought Treasuries and held them for the past 30 years, your returns have been quite attractive, probably in excess of the return you would have had if you'd invested in equities. But now the upside is limited, so it's time for investors to move away from Treasuries if they haven't already begun to do so.
So should investors rid their portfolios of Treasuries?
It's always hard to eliminate an asset class because I'm a staunch believer in diversification. But if you push me hard enough, I'd tell you that I would have no allocation to Treasury securities at this point.
Link to article: http://finance.fortune.cnn.com/2012/04/18/bonds-bear-market/
I like this guy already.
Pretty straightforward - for what it's worth, I agree. The flip side of course is hunger for yields will drive capital away from higher-grade investments. Is higher macro volatility in order?
Probably. By some measures, 10-year treasuries are more overvalued than stocks were in 2000.
In 2000, the P/E on the S&P 500 hit 35 for an earnings yield of 2.8%. Bear in mind that earnings typically scale with inflation and economic growth unlike bonds.
Today, the 10-year-yield stands at 2.0%. TIPS are trading with negative real yields. People are paying the US Treasury 50 basis points per year to store their grain, gold, and canned goods for five years.
If you're the kind of investor with $5K to invest, buy Series I Savings bonds. You're buying at a 2.5% discount to the market, and you can dump them after a year with a 3 month penalty if rates go up.
My Dad's the wisest guy I know. I've met a few folks smarter than him during my time on Wall Street, but I still don't think anyone is absolutely wiser. He estimated a bottom in the October panic at 7800 on the first -700 day at 10000, and he turned out to be off by 300 points. His advice has echoed some of Mr. Minerd's with regard to the crash and now with bond yields.
"Long-term bond yields are going to go lower until they don't, and then there are going to be a lot of very shocked and unhappy 'conservative' investors. But the bond market can stay irrational much longer than you can stay liquid, my son."
Yo, just curious... in regards to the 10-yr yield, you think this is just 'Flight to Quality' since people think there's nothing safer? Otherwise makes no sense...
i wouldnt wanna be in a bear market unless they're all in cages
what if a bear handler was present?
Treasury bonds: Return free risk
Hardly. Long-term bonds have appreciated more and yielded more, all with negative correlation vis-a-vis SPY.
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