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'Everybody' hates Treasuries...and then there's Gary Shilling

Aaron Task
Editor in Chief

U.S. Treasuries continue to benefit from the combination of rising geopolitical tension and fears of slowing global growth. At 2.54%, the yield on the 10-year Treasury hit their lowest level since Sept. 11 on Tuesday morning.

Nevertheless, the conventional wisdom on Wall Street is bond yields are set to rise as the Federal Reserve winds down its quantitative easing program next month and (presumably) starts to actually tighten policy next year. Goldman Sachs Asset Management predicts yields on the 10-year will rise to as high as 4% in the next 12 months, Bloomberg reports.

Of course, predictions of rising Treasury yields have been a mainstay of Wall Street forecasts in recent years and -- save for the "taper tantrum" last spring -- have proven greatly exaggerated. In short, the continued strength in U.S. Treasury prices (which move in opposition to yields) has been one of the most surprising developments in financial markets in recent years -- certainly in 2014.

But while "everybody" has been wrong about Treasuries, Gary Shilling has remain steadfastly bullish -- and right.

"We believe that a 'risk on' investment climate still prevails, despite the many warning signs related to economic growth and financial markets here and abroad," Shilling writes in the last edition of his newsletter Insights. "So we continue our defensive stance towards equities and suggest Treasuries as a safe haven and beneficiary of possible deflation, especially in the Eurozone, as well as the strengthening dollar."

As discussed in the accompanying video, Shilling doesn't think the long-term rally in Treasuries (going back to 1981) is over yet "because Treasuries are the safe haven in the world" and, secondly, inflation is low and "there's real risk of deflation, particularly in Europe."

Betting on a strengthening dollar is another trade where Shilling went against the prevailing wisdom on Wall Street and has, thus far, proven prescient. Currently he is long the dollar against a number of currencies, including the euro and yen, as well as "commodity currencies" like the Canadian loonie, and Australian and New Zealand dollars.

As with Treasuries, he thinks the dollar's strength "probably has a lot further to go."

In fact, Shlling believes there could be a "rush for the dollar and Treasuries as safe havens" in the event of a "shock" such as a financial crisis in China that sends stocks and commodiites tumbling. In other words, Shiling likes Treasuries during both a "risk on" and "risk off" backdrop.

As for the stock market, Shilling remains long defensive sectors such as healthcare, consumer staples and dividend yields.

"I think this market really isn't based on fundamentals," he says. "Profits aren't growing because of pricing power and unit volume growth. It's not a sustainable kind of thing."

Aaron Task is Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.