GARY SHILLING: The 30-year bond is going to 2%

Gary Shilling thinks the “Long Bond” is going to 2%.

This weekend, Shilling was a guest on Bloomberg’s Masters in Business podcast with Barry Ritholtz and made a bold call on the future of the 30-year Treasury bond.

(The 30-year bond is referred to as the “Long Bond” because not only is it the longest-dated Treasury bond issued by the Treasury Department, but it’s the only bond issued by Treasury that is actually called a bond: paper between 2 years and 10 years in duration are notes, and the shortest-dated paper are bills.)

“In 1981, the yield on the 30-year Treasury was 15.21%, and I said in writing we’re entering the bond rally of a lifetime,” Shilling told Ritholtz.

“I saw inflation unwinding, and with lower inflation that would push down yields, pushing up bond prices. And I think we’re still in that. Yields now, obviously, have dropped a tremendous amount: we’re a little under 3% for the 30-year bond and I think we’re going to go to 2%.”

Gary shillingBloomberg TVGary Shilling.

Shilling, who was the first economist at Merrill Lynch back in the 1960s, is one of the longest-tenured voices on Wall Street and is clearly not willing to give up on what has amounted to the call of a lifetime.

As Shilling noted, the early 1980s saw soaring inflation that was eventually tamed by bold action from Paul Volcker’s Federal Reserve, which cranked up interest rates, briefly taking the US economy into recession in an ultimately successful effort to tamp down inflation.

In addition to stinging inflation, this move also set off what has been a relentless rally in bond yields and interest rates over the last 35 or so years, one that has not yet ended (despite the call Wall Street has been making for years).

30yrFFFREDThe almost uninterrupted decline in the 30-year yield, mapped with the steadily declining Fed Funds rate.

Shilling continued:

Somebody says, “Well, what does that do for you?” And I say I’ve never cared what the yield is as long as its going down, because that means the price of the bonds is going up. And when you look at the convexity of this whole thing, if I’m right and you go from essentially 3% to 2% on a 30-year coupon bond, you make 30% on your money, which I think is going to be a lot better than what’s in second place.

Shilling spoke with Ritholtz for about 90 minutes, discussing his thoughts on the oil market, the usefulness of economic models, and honey bees.

You can — and should — listen to the whole interview here »

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