Could the best be yet to come for the bond market? Some experts think so.
While it's easy to get caught up in the day-to-day fluctuations of bond yields, the long-term trend has been unmistakably down since the early 1980s.Still, some bond bulls note, long-term rates remain far above the levels of the 1950s and 1960s. That leaves room for further bond-market gains. (Bond prices move in the opposite direction of yields).
A leading exponent of dramatically lower long-term rates - and thus of rising values of existing bonds with higher yields - is Richard Hokenson, chief economist of Donaldson, Lufkin & Jenrette, a New York investment firm. He believes demography is destiny, at least as far as the bond market is concerned.
The 1990s, Hokenson says, is the first decade in which there will be a substantial decline in the number of people in the world's industrialized nations who are entering their 20s. That's critical, he says, because this is the age when "young people leave home and set up their own households, beginning the life cycle of the accumulation of consumer goods."
With less demand for consumer goods in developed nations, producers will find it difficult to raise prices and inflation will tumble, he says. Hokenson estimates inflation will fall to 1.5 percent a year by the end of the 1990s, allowing yields on 30-year Treasury bonds to trend down toward 4 percent.
Bill Gross, who heads PIMCO, a highly regarded bond-management firm, subscribes to Hokenson's demographic arguments. Gross also cites high consumer-debt levels, high current real interest rates (that is, adjusted for inflation) and improvements in productivity brought about by massive investments in technology and equipment.
All this, Gross concludes, is a "disinflationist's dream . . . a scenario for declining inflation and increasing bond prices."
PIMCO sees long Treasuries fluctuating between 5 percent and 7 percent over the next three to five years, compared with 6.7 percent in late August. If such forecasts come anywhere close to reality, the implications for fixed-income investors are profound: Those who tend to buy shorter-maturity notes and CDs could face dramatic reductions in interest income over the next few years.