VAN R. HOISINGTON AND LACY H. HUNT: Long-term Treasury yields (over 20 years) are likely to rise, as monetary excess lifts expected inflation and a capital shortage lifts real rates and risk premiums
The Gist
Hoisington and Hunt now expect long-term Treasury yields to go up, because too much money points to more inflation, and because the government and the country need to borrow more than people save. This is a steelman: Van R. Hoisington and Lacy H. Hunt's arguments are reconstructed in their strongest fair form, not endorsed.
Conclusion
Yields on long-term Treasury bonds (maturities over 20 years) are likely to rise: money growing well above its non-inflationary benchmark raises expected inflation, while low saving, heavy government borrowing and high foreign yields push up real rates and risk premiums, and these risks persist until money growth comes back in line with the benchmark.
Premises
- The non-inflationary rate of broad money growth today is about 3 percent a year (range 2.75 to 3.25 percent): roughly 2 percent potential real growth plus the 2 percent inflation target, less about 1 point for rising velocity.
- Broad money growing at about 6.5 percent a year, roughly double the 3 percent benchmark, is a monetary excess similar in scale to 1979 and risks nominal spending outrunning productive capacity, keeping inflation and inflation expectations above target.
- The U.S. faces a capital shortage: the 1990 to 2020 disinflationary forces have faded or reversed while low national saving, deficits near 6 percent of GDP late in an expansion and multi-decade-high foreign bond yields push up real interest rates and risk premiums.
Assumptions
- Long-term yields are the sum of expected inflation, the real rate and a term or risk premium.
- Financial interest: Hoisington Investment Management manages U.S. Treasury portfolios and for decades was known for holding very long-duration Treasuries on a falling-inflation, falling-rates view. Press reports on its 2026 letters say the firm cut effective duration from about 20.9 years at the end of September 2025 to under one year by June 30, 2026, so this letter's forecast of higher long-term yields is consistent with the firm's current short-duration positioning rather than with its earlier long-duration stance. Sources: "Decades long bull turns bearish. Cites structural deficits…
Analysis
Argument type: Inductive.
Potential Fallacies
- Weak or single-case analogy (Premise 2) — Likening current money growth to 1979 compares magnitude alone. In 1979 inflation was already near 11%, expectations were unanchored, and the Fed's credibility and operating regime were very different. A similar ratio of money growth to benchmark does not guarantee a similar transmission to inflation or yields, and the analogy leans on emotional salience as much as evidence.
- False precision (Premises 1 and 2) — The 2.75–3.25% benchmark is built from uncertain inputs (potential growth and a velocity trend), and velocity has been highly unstable. A small change in the velocity assumption moves the benchmark by a third or more, so the narrow range and the 'roughly double' framing convey more certainty than the inputs support.
- Missing bridge premise (level versus change; priced-in information) (Inference from Premises 2–3 (via A1) to Conclusion) — The premises describe upward pressure on components of yield, and A1 shows how the components sum. Concluding that yields will rise requires an extra claim: that these pressures are not already reflected in current yields and are not offset by other components. Deficits, money growth and foreign yields are public information, and the argument does not say why the market has mispriced them.
- Modal strengthening ('risks' to 'likely') (Premise 2 to Conclusion) — Premise 2 says monetary excess 'risks' inflation, a possibility claim, while the conclusion asserts that a rise is 'likely', a probability claim. The conclusion is firmer than the premise that supports it.
- Unfalsifiable or open-ended forecast (Conclusion) — With no time horizon, magnitude or probability, and a persistence clause ('until money growth comes back in line'), almost any outcome can later be read as consistent with the call, for instance as 'not yet'. This reduces the claim's testability and practical value.
- Bundling of distinct factors / one-sided accounting (Premise 3) — 'Capital shortage' groups low saving, deficits, foreign yields and fading disinflation into one narrative. Each has a different transmission mechanism and an uncertain, sometimes modest, effect on real rates. Offsetting forces (safe-asset demand, aging, productivity, weak growth) are not weighed, so coherence of the story substitutes for quantified evidence.
Counterarguments
These challenges are not ranked.
- Premise 2 (High impact) — Broad money growth is an unreliable guide to inflation because velocity and the money multiplier are unstable. Large M2 expansions in 2009–2019 produced little inflation, and in 2022–23 inflation fell sharply while M2 contracted. Most central banks abandoned monetary targeting for this reason. The 1979 comparison also overlooks anchored expectations, inflation targeting and a different financial structure.
- Conclusion (High impact) — Money growth, deficits and foreign yields are public information, so they are already reflected in the yield curve, term-premium estimates and inflation breakevens. A call that yields will rise needs a claim that the market misprices these factors, and none is offered. Forecasters have a poor record of predicting the direction of long yields.
- Conclusion (High impact) — Offsetting forces could push long yields down despite monetary and fiscal excess: a recession or financial accident prompting flight to safety, Fed easing or yield-curve control, Treasury shifting issuance to bills, or steady demand from pensions, insurers, banks and foreign reserve managers. The authors' own earlier thesis (debt overhang and weak growth suppress yields) rested on such forces.
- Premise 1 (Medium impact) — The benchmark depends on a +1 point velocity assumption and a 2% potential growth estimate. AI-driven productivity gains could raise potential growth, and flat or falling velocity would raise the benchmark. Either would shrink the 'doubling', and the benchmark itself shifts endogenously with rates and financial innovation.
- Premise 3 (Medium impact) — Persistent deficits and high debt have not reliably produced high real rates elsewhere (Japan being the standard example). Deficits and low saving also coexist with global savings gluts and safe-asset demand. A specific US, current-regime mechanism is needed, and the argument does not supply one. The same authors long argued that debt overhang depresses growth and yields, and the reversal is not reconciled.
- Conclusion (Medium impact) — The inflation and real-rate channels can offset each other, since a Fed response to inflation raises real rates but lowers expected inflation. Higher yields also raise interest costs, slow credit and money growth, and can trigger a growth slowdown. These balancing feedbacks make the net effect on long yields ambiguous.
- Conclusion (Low impact) — The firm's duration is already under one year, so the letter coincides with its own positioning and cannot be treated as independent confirmation. This bears on the weight given to the forecast, not on whether it is true, and the reversal from the firm's prior view also shows a willingness to update.
Suggested Improvements
- Forecast specification — State a time horizon (such as 12 and 24 months), a target (such as the 20-year constant-maturity yield), a magnitude, and a probability, and identify what outcome would show the thesis wrong. This makes the claim testable and comparable with forward rates and consensus, and prevents the persistence clause from absorbing disconfirming outcomes.
- Market-pricing gap — Decompose the current 20+ year yield into breakevens, real yield and an estimated term premium (for example ACM or Kim-Wright), and show which component is misaligned with the fundamentals cited. It turns a general narrative into a specific claim of mispricing, which is what a directional call actually requires.
- Benchmark robustness — Show a sensitivity analysis of the money-growth benchmark to velocity and potential-growth assumptions, and provide out-of-sample evidence that excess money growth relative to the benchmark has predicted subsequent inflation and long yields across eras and countries. The 'doubling' claim rests on one soft input, and a track record would address the repeated breakdowns of the money-inflation link.
- Historical analogy — Compare the present with a broader set of high-money-growth episodes (1970s, 2009–2015, 2020–21) and explain the disanalogies with 1979 in starting inflation, expectations, central-bank credibility and policy response. A larger reference class guards against cherry-picking and shows when excess money growth does and does not lift yields.
- Capital-shortage quantification — Estimate the contribution of deficits, low saving and foreign yields to real rates and term premiums, and weigh them against safe-asset demand, aging and productivity. Quantified, weighted effects would replace a bundled narrative with testable claims.
- Counter-scenarios and consistency with prior view — Address recession, flight-to-safety and policy-intervention scenarios explicitly, and explain why the earlier debt-overhang/deflation framework has lost force. Engaging the strongest opposing case, including the authors' own earlier thesis, would improve credibility and calibration.
Scenario Tests
- Broad money growth stays near 6.5% for another two years, inflation runs above 3%, and the Fed keeps policy loose. (Supports) — This is the core scenario for the thesis. Higher expected inflation and risk premiums would plausibly lift long yields. It still requires that markets have not already priced the path.
- A recession or financial accident triggers a flight to safety and Fed easing while money growth remains elevated. (Challenges) — Long Treasuries could rally despite excess money and large deficits, as in past risk-off episodes. The call would fail on direction, and this is exactly the scenario the authors' earlier deflation thesis anticipated.
- Velocity falls or stays flat so that rapid money growth is absorbed into deposits and financial assets, and inflation falls toward 2%. (Challenges) — The 'excess' would dissolve, the inflation-expectations channel would break, and the benchmark would be exposed as too low, as in the 2009–2019 experience.
- Deficits stay near 6% of GDP and foreign long yields keep rising while domestic growth and inflation stay moderate. (Supports) — The capital-shortage channel alone could raise term premiums and real rates, as seen in the long-end repricing since 2022–23. The forecast does not depend solely on the money argument.
- Long yields rise only modestly or rise after a long delay, say five years rather than one. (Neutral) — The forecast is technically vindicated, but because no horizon was specified, it is of limited practical use. A position taken early could lose money for years, and this shows why timing matters.
- The Fed tightens or Treasury shifts issuance toward bills, capping long yields even as money growth stays high. (Challenges) — Policy responses can neutralize the term-premium and inflation-expectation arguments and weaken the link between money growth and long yields.
Coherence & Relevance
The argument is coherent as a convergent inductive case: A1 supplies an additive framework, P2 supports the expected-inflation component, P3 supports the real-rate and risk-premium components, and P1 defines the benchmark behind P2. The structure holds if the components rise and none offsets them. The weaknesses lie in the unstated bridging conditions (no offsetting forces, not already priced in), the lack of a horizon or magnitude, a persistence clause not derived from the premises, and reliance on a contested monetarist framework and a single historical analogy. The disclosed financial interest bears on how much weight to give the forecast, not on its logical form. Overall the case is plausible and internally consistent but falls short of establishing that a rise is more likely than not.
- The non-inflationary rate of broad money growth today is about 3 percent a year (range 2.75 to 3.25 percent): roughly 2 percent potential real growth plus the 2 percent inflation target, less about 1 point for rising velocity. (Moderate) — P1 is a definitional input that gives meaning to 'excess' in P2, not independent evidence about yields. Its relevance depends on a stable money-inflation link and a reliable velocity estimate, neither of which is established.
- Broad money growing at about 6.5 percent a year, roughly double the 3 percent benchmark, is a monetary excess similar in scale to 1979 and risks nominal spending outrunning productive capacity, keeping inflation and inflation expectations above target. (Strong) — It addresses the expected-inflation component of yield directly. Missing are the transmission lag, the Fed's reaction, and evidence that expectations are not already priced into yields. It also states a level (inflation above target), whereas the conclusion needs a change (yields rise).
- The U.S. faces a capital shortage: the 1990 to 2020 disinflationary forces have faded or reversed while low national saving, deficits near 6 percent of GDP late in an expansion and multi-decade-high foreign bond yields push up real interest rates and risk premiums. (Strong) — It addresses the real-rate and risk-premium components independently of the money argument. The effect sizes are not quantified, offsetting forces are not weighed, and the claim does not show that these widely known conditions are not already in current yields.