Bond traders have been losing a lot of sleep for some time. Last year they were worried about low prices and the credit bubble in China, this year it is uncertainty about President Donald J. Trump’s policies that is spooking them.

All this might have average investors wondering if it is time to dump bonds and shift money into something more liquid like stocks or currencies. The rates on some recent government debt issues seem to justify such a switch in strategy.

Bleak Times for Bonds

The three month US Treasury came with a yield of just .5% on January 20, 2017, according to Bloomberg. Even the best paying 30 year treasury issue came with a yield of just 3.05%. Those numbers in particular raise concerns about inflation and they were actually better than some foreign bonds.

The UK Gilt two year bond had a yield of just 1.8%, and the UK Gilt 30 year had a yield of just 2.0% on January 20, 2017. Australian government bonds did little better, the two year had a yield of 1.89% and the 15 year had a yield of 3.21%. Germany’s two year bund had a yield of -.69% while the 30-year bund had a yield of 1.19%.

From those numbers it’s easy to see why many investors are staying out of the bond market. Nor is China giving them much hope, its government wants to limit corporate debt and cut government spending, probably out of fear of inflation, Reuters reported. Corporate debt in the People’s Republic is now 169% of gross domestic product which adds credence to fears about a credit bubble.

Hope for Bonds

There is some hope for bonds; HSBC is expecting more growth and inflation in the coming year, Reuters reported. The HSBC optimism is based on resilience in China and hope for a fiscal boost in the United States.

Two dark clouds hovering over that rosy scenario are low oil prices and the situation in Europe. Falling economic activity in Europe might offset any gains in the U.S. and China. Lower oil prices means that many countries will have less buying power, which equals lower economic activity.

A wild-card is U.S. President Donald J. Trump who has promised radical economic policies including rigid protectionism and higher levels of spending. Bond traders have been concerned about speculation that Trump’s policies might lead to inflation on the part of the U.S. Federal Reserve.

There has also been speculation about increased interest rates which makes bond investors happy. The Fed did raise interest rates for the second time in just a decade on December 16, 2016. The increase was just .25% but it perked up the hopes of bond investors who have had to put up with decades of near zero interest rates.

Should you be long on Bonds?

All this brings us to the one million dollar question: should you be long on bonds. American bond guru Lacy Hunt told Bloomberg that you should, because he thinks the velocity of money is slowing.

Hunt’s bet is that high levels of debt are dampening economic activity and monetary velocity. There is some evidence that is occurring with the outflow of cash in some countries, particularly China, into liquid hedging instruments like bitcoin. When monetary velocity slows, many investors hedge by moving cash into highly-liquid alternatives.

The People’s Bank of China (PBOC) is so worried about the bitcoin trade that it is cracking down on exchanges for the popular cryptocurrency, Reuters revealed. The PBOC seems to be scared of outflows of currency. One fear driving the recent spike in bitcoin prices was inflation, because cryptocurrencies are widely seen as a poor man’s hedge against inflation.

“When debt is at high levels and increasingly counterproductive, the most important lesson of economic history is that the velocity of money falls,” said Hunt said, who helps manage $3.6 billion in assets. “I’m still long bonds, especially the long-end.”

Does Monetary Velocity Hold the Key to the Bond Market?

Monetary velocity in the United States is at a record low of 1.44. That means dollars are only circulating at a rate of 1.44 which indicates a very low level of economic activity in the world’s second largest economy.

Hunt thinks inflation is unlikely in the US because private sector investors; particularly large companies in Silicon Valley and elsewhere, are hoarding cash. Fortunately there is some evidence to back up this assertion.

Alphabet Inc. (NASDAQ: GOOG) the company also known as Google had $83.06 billion (€77.61 billion) in the bank on September 30, 2016. Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) had accumulated $84.84 billion (€79.27 billion) in cash as of the same day.

Hunt is certainly a man to listen to; his Wasatch-Hoisington U.S. Treasury fund outperformed 90% of its peers for three of the last four years. Hunt, 74, also remembers the last bear bond market in bonds which occurred back in the 1970s.

Hunt’s prediction is that there will be an extended rally in bonds perhaps driven by increased government spending in the United States and China. One reason for the increased spending will be an effort to kick start monetary velocity.

So yes we should be worried about the bond market, but is there is some hope for it. If you have a lot of money to play around with, putting some money in bonds might not be a bad idea. Inflation and changes in fiscal policy might prove bond bulls like Hunt right.