It began, as so many illusions do, with a pronouncement. Back in the year 2018 – a time already fading into the mists of recent history – a certain Cathie Wood ventured a prediction concerning the fortunes of Tesla. Four thousand dollars a share, she declared, within five years. A sum then considered, by the prevailing consensus, a fantastical excess. The share traded then for a mere three hundred and fifty dollars. A multiplication of over eleven times. It was not merely optimism; it was a defiance of the established order of things.
The markets, of course, were bullish on Tesla, as they are on all fashionable ventures. But Wood’s bullishness was of a different order. It was a solitary beacon, a willingness to see beyond the immediate currents of speculation. And, as it transpired, she was proven correct. Not merely correct, but early. Two years before the appointed time, the prediction materialized. This is not to say all her prognostications have borne fruit. The world is a labyrinth of uncertainties, and even the most astute observer will stumble. But to dismiss her insights outright would be an act of willful blindness.
Her latest utterance concerns the specter of inflation. A relentless pressure that has borne down upon us for seasons. She posits a potential decline, perhaps even a vanishing, of this affliction. “If we’re right,” she states, “growth will be much stronger and…inflation will be much, much lower.” A simple proposition, yet one that challenges the ingrained assumptions of our time. She speaks of falling oil prices, declining rents – factors dismissed by many as mere transient fluctuations.
Of course, the path is strewn with contingencies. A fall in oil is not guaranteed. Shelter costs, stubbornly resistant to gravity, may remain aloft. The tariffs – those arbitrary impositions upon trade – continue to cast a long shadow. But let us, for a moment, entertain the possibility that Wood’s vision is accurate. What then? A reckoning in the bond market. A potential resurgence of long-term bonds. A respite from the years of erosion.
The Case for Long Duration
The current state of affairs, as dictated by the Federal Reserve, places the ten-year breakeven inflation rate around 2.3%. If inflation were to recede to zero – a prospect many deem improbable – and real yields were to remain stable, we might anticipate a corresponding decline in long-term bond yields. A fall of approximately 2.3 percentage points. A modest gain, perhaps, but a gain nonetheless.
Consider the iShares 20+ Year Treasury Bond ETF, a vessel for these long-duration instruments. Its duration, a measure of its sensitivity to interest rate fluctuations, stands at roughly 15.5 years. For every one percentage-point decrease in interest rates, the portfolio’s value could rise by 15.5%. A simple arithmetic, yet one that illuminates the potential upside.
If long-term rates were to fall by 2.3 percentage points, and the ETF were to respond in kind, the potential gain could approach 35%. A substantial reward for those willing to navigate the treacherous currents of the market. But let us not succumb to delusion. Real yields may not remain steadfast. The components of inflation – rent, energy, food – may deviate from the overall trend. The tariffs, those instruments of economic coercion, may persist, stifling any genuine recovery.
Yet, the signs are there. The labor market is cooling. Manufacturing activity is contracting. Demand for both goods and energy is waning. These are disinflationary forces, working in concert to alleviate the pressure. Whether they will be sufficient to bring inflation to zero, or merely to slow its ascent, remains to be seen. But given this backdrop, and the potential for technological innovation to further dampen price pressures, the possibility is far from remote.
And that, perhaps, is the most compelling argument. Not the precise calculation of potential gains, but the recognition that a shift in the underlying forces is underway. A change that could herald a new era for the bond market. A moment of respite after years of hardship. A glimmer of thaw in the long winter of inflation.
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2026-01-20 04:32