A CIO managing $20 billion says one of the best opportunities for investors right now is in a corner of the bond market

Elliott Dornbusch sees the 30-year Treasury bond as a strong investment opportunity.

He expects long-term yields to fall as inflation fears ease over time.

Most strategists prefer mid-duration bonds, but Dornbusch favors the 30-year for its high yield.

You don’t often hear about the 30-year Treasury bond as a top investment opportunity, but one CIO wants you to look again.

Investors typically keep their eyes on a couple of key interest rates: the 10-year Treasury yield, since is heavily influences things like mortgage rates and is a proxy for longer-term inflation expectations; and the ultra-short-term fed funds rate, which is what the Federal Reserve adjusts to stimulate or slow down the economy.

Yet, the 30-year Treasury is one of the most attractive investment opportunities in markets right now, according to Elliott Dornbusch, the chief investment officer at CV Advisors, which manages $20 billion in assets.

Yields on the 30-year are a robust 4.8%, considerably higher than the 10-year’s 4.14%. That’s because investors tend to demand more compensation for the extra duration risk they take on.

For many, the 30-year’s uber-long duration is one of its most undesirable qualities. If yields rise and the note’s value falls, you don’t want to be stuck holding it for three decades. But Dornbusch is banking on being able to sell the asset for a profit a lot sooner than that.

He said he expects yields to fall—which means bond prices will rise—from current levels for a couple of reasons. First, he thinks investors are overstating long-term inflation risk, thanks in part to tariffs. While import taxes lead to higher goods prices, they also cut into demand for services, which balances out the overall inflation equation, he said. It’s also, theoretically at least, a one-time price movement.

“If you think long term, tariffs are deflationary because they’re taking money away from people’s pockets,” Dornbusch said, adding: “People might not go to Disney, for example.”

Second, if stocks suffer a bear market at some point, investors will likely seek safety in long-term Treasurys. That heightened demand for the risk-free assets will push their value up and their yields down, allowing those who bought in at current prices to sell them for a profit. In this sense, it also acts as a portfolio hedge.

“You could get a return on the 30-year Treasury for the next 4 years that kind of resembles like a 10% return — both on coupon and on appreciation, if you have the patience,” he said. “It also serves as a great hedge for my long equity position.”

Dornbusch’s view runs counter to the views of other bond-market strategists. Consensus today seems to prefer the so-called “belly” of the yield curve — mid-duration assets in the two-to-five year range. With short-term rates on a downward path, this approach allows investors to lock in yields at around 3.5% for the next few years while not having to sweat too much about duration risk if yields end up rising on an inflation scare.

But as Dornbusch sees it, if long-term yields are going to come down, you might as well clip a coupon that’s almost 5% in the meantime.

“I’m very contrarian and I really like the thirty-year Treasury bond today,” he said. “I think that this idea of inflation in the economy, people will realize the reality of how inflation works and the 30-year treasury yielding almost 5% is extremely attractive.”

Read the original article on Business Insider