If you’re convinced the plummet in yields of U.S. government bonds is an aberration, it may be because you haven’t been in the business long enough.

With the longest-dated Treasuries now yielding less than half the 6.8 percent average over the past five decades, it’s not hard to see why forecasters say they’re bound to rise as the Federal Reserve prepares to raise interest rates following the most aggressive stimulus measures in its 100-year history. Yet compared with levels that prevailed in the half-century before that, yields are in line with the norm.

For David Jones, the former vice chairman at Aubrey G. Lanston & Co. and a 51-year bond veteran, the notion that Treasury yields are too low is being shaped by traders, money managers and economists who began their careers in the wake of runaway inflation surpassing 10 percent in the 1970s and 1980s. With U.S. consumer prices rising at the slowest pace in five decades and economic growth weakening around the world, today’s bond market may now be reverting back to form, he said.

“We have come full circle,” Jones, 76, said by telephone on Dec. 1 from Denver. “Rather than decrying how low interest rates are and expecting them to shoot higher, it may be that we’re in more normal territory than we thought we were.”

Economists and strategists in a Bloomberg survey are sticking to their calls that yields will rise and predicting those on long-term Treasuries will reach 3.88 percent next year.

Lacy Hunt, the 72-year-old chief economist at Hoisington Investment Management, says lackluster demand and inflation will likely keep yields low for years to come as the U.S. contends with record debt levels.

David Fuller's view

I commend the rest of this article to subscribers because of its longer-term perspective.

In recent years many of us riding the global equity bull market have kept a wary eye on long-term government bond yields, particularly those of US 10-Yr Treasuries.  The concern was that as the US economy recovered, let alone global GDP growth, bond yields would push higher and eventually create a competitive headwind for equities, just as we have seen since the 1970s. 

That risk should not be dismissed, because it could still happen.  However, there are other factors which we should consider, that could significantly mitigate that problem. 

Today’s global environment is quite different in a number of respects from what we saw in the 1990s, let alone the 1970s, for one very important reason – the visibly accelerating rate of technological innovation which we are now experiencing.  Technologies, created by mankind, have been with us throughout human history, although centuries could pass between significant technological breakthroughs.  More rapid changes commenced approximately 200 years ago.  Today, the speed of technological developments has become exponential in many areas and is consequently a far more important influence on our lives.

We often associate technology with increased efficiency in our everyday lives, our careers, the functioning of corporations, economies, and overall global development.  However, the flip side of this technological efficiency is its disinflationary and even deflationary influence on our lives.  

Consider crude oil, which is still the world’s most important industrial commodity, but perhaps not for all that much longer.  For decades we have assumed that the world was running out of oil.  However, technology has enabled us to find and produce much more of it through both conventional and unconventional drilling.  It has also enabled us to use oil more efficiently.  Technology has similarly enabled mankind to turn natural gas into a major fuel.  It is also helping us to develop many alternative sources of energy.  Just as oil and natural gas are enabling us to leave coal in the ground, new technologies will also ensure during this century than a great deal of oil is left underground.

Similarly, industrial metals are now found, extracted and refined more efficiently with the considerable help of technology.  The invention of graphene and other manmade resources will successfully compete with metals long before we run out of these industrial resources. These are just a few of the many examples in which technology is lowering costs and increasing productivity in basic industries. 

I mention the above because improving technologies and ever smarter machines are an increasingly important factor in far more industries than ever before.  Most of us use them every day, starting with the internet, which now connects most of the world.  This has considerably lowered both the cost and speed of communication. 

We now have a global economy which is vastly more efficient thanks to technology and competition.  Companies can produce many goods and services far more quickly and efficiently.  This lowers costs in real terms for most products and services.  In a very personal example, this global strategy service can provide much more coverage, far more quickly, for a considerably lower price in real terms, with a small fraction of the personnel required twenty to thirty years ago. 

The examples are endless but I am at risk of belabouring the point.  An interconnected global economy is more efficient and competitive.  Smart machines make corporations and individuals more efficient (unless you have to use a call service).  The net result is very disinflationary and deflationary.  Obviously, there will always be temporary pockets of inflation but these are more likely to be the exceptions rather than the norm. 

Will this still be true when the global economy is next firing on all cylinders?  Logically, that would introduce more inflationary pressures than we see today, but I think it very unlikely that Paul Volcker’s extremely high interest rate medicine of the 1970s will be required.  The chances remain that US long-dated interest rates are in a lengthy bottoming out process, but there is a reasonable chance that upward scope for yields will be gradual and moderate relative to earlier cycles of the last century.  If so, that would be another overall plus factor for the prospects of a secular bull market in equities.