Wasatch-Hoisington U.S. Treasury Fund® (WHOSX) 

Federal-Debt Accelerations Ultimately Lead to Lower, Not Higher, Interest Rates
by Van R. Hoisington, V.R. Hoisington Jr. and David Hoisington

“Debt-funded traditional fiscal stimulus is extremely fleeting when debt levels are already inordinately high. Thus, additional and large deficits provide only transitory gains in economic activity, which are quickly followed by weaker business conditions.”

Van Hoisington
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Investing in bonds, you are subject, but not limited to, the same interest rate, inflation and credit risk associated with the underlying bonds owned by the Fund. Return of principal is not guaranteed. Interest rate risk is the risk that a debt security’s value will decline due to changes in market interest rates. The interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Even though some interest-bearing securities offer a stable stream of income,their prices will fluctuate with changes in interest rates. Inflation risk is the possibility that inflation will reduce the purchasing power of a currency, and subsequently reduce the value of a security or asset, and may result in rising interest rates. Inflation is the overall upward price movement of goods and services in an economy that causes the value of a dollar to decline. Credit risk is the risk that the issuer of a debt security will fail to repay principal and interest on the security when due. Credit risk is affected by the issuer’s credit status, and is generally higher for non-investment grade securities.

For the period ended March 31, 2019, the average annual total returns of the Wasatch-Hoisington U.S. Treasury Fund for the one-, five- and ten-year periods were 5.85%, 5.85%, and 5.11%, and the returns for the Bloomberg Barclays US Aggregate Bond Index were 4.48%, 2.74%, and 3.77%.  Expense ratio: Gross 0.70%


Data shows past performance, which is not indicative of future performance. Current performance may be lower or higher than the data quoted. To obtain the most recent month-end performance data available, please click on the “Performance” tab of the individual fund under the “Our Funds” section. The Advisor may absorb certain Fund expenses, without which total return would have been lower. Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost.

Wasatch Funds will deduct a 2.00% redemption proceeds fee on Fund shares held 60 days or less. Performance data does not reflect the deduction of fees, including sales charges, or the taxes you would pay on fund distributions or the redemption of fund shares. Fees and taxes, if reflected, would reduce the performance quoted. Wasatch does not charge any sales fees. For more complete information including charges, risks and expenses, read the prospectus carefully.

Wasatch Funds are subject to risks, including loss of principal.


The views expressed in this commentary are those of Hoisington Investment Management Company, the sub-advisor to the Fund, and may differ from the views of Wasatch Advisors.

U.S. Treasury bond yields decreased in the first calendar quarter of 2019 after increasing for much of 2018. The 30-year Treasury bond yield declined to 2.81% down from 3.02% at the end of 2018. Fiscal-policy actions, which stimulated gross domestic product (GDP) growth early last year, proved to be fleeting. By late 2018, that stimulus was almost impossible to detect in the broad economic aggregates.

Details of the Period

For the three months ended March 31, 2019, the Wasatch-Hoisington U.S. Treasury Fund gained 5.37%, while the benchmark Bloomberg Barclays US Aggregate Bond Index only rose 2.94%. For the 12-months ended March 31, 2019, the Fund gained 5.85%, outperforming the Index, which increased 4.48%.

Outlook for the Year

The slowdown in U.S. economic activity that started in 2018 has continued into 2019, as confirmed by deteriorating indicators in cyclical bellwether sectors—autos, housing and capital spending—and broad economic aggregates. This has been acknowledged by the Federal Open Market Committee (FOMC) and recognized in the market, as revealed by declining yields in high-grade money and bond markets. These developments reflect the unfolding of two major economic theorems. First, federal-debt accelerations ultimately lead to lower, not higher, interest rates. Debt-funded traditional fiscal stimulus is extremely fleeting when debt levels are already inordinately high. Thus, additional and large deficits provide only transitory gains in economic activity, which are quickly followed by weaker business conditions. With slower economic growth and inflation, long-term rates inevitably fall. Second, monetary decelerations eventually lead to lower, not higher, interest rates as originally theorized by economist Milton Friedman.

In the past 20 years, gross government debt as a percentage of GDP advanced dramatically in all major economic areas of the world, yet long-term government bond yields dropped sharply in these areas. This result contradicts the view that the supply of government debt determines long-term risk-free yields. In microeconomic models and standard supply/demand analysis, increasing the issuance of debt could push yields higher. Quite possibly in the short-run heavy issuance of government debt has this presumed effect, but it is not the ultimate determinant of long-term risk-free rates.

The Fisher equation (i=r+ πe) defines the long-term risk-free rate as being equal to the real rate plus expected inflation. This means that any short-run increase in yields caused by greater supply is eventually reversed by deteriorating economic and inflation fundamentals. Undoubtedly, government debt will rise sharply relative to GDP over the next several years. This increased debt level will weaken economic activity, thus inflation, pushing long-term yields lower, thereby continuing the now almost three-decade-long trend toward lower long-term Treasury yields.

Irving Fisher’s equation of exchange (M2*V=GDP) states that money times its turnover (velocity) is equal to nominal GDP. The Federal Reserve (Fed) has virtually no control over the velocity of money, but it can influence the monetary and credit aggregates. The Fed’s actions over the past four years fit a pattern that has many precedents in economic history. The reserve aggregates, such as the monetary base and excess reserves, peaked in the summer of 2014. The federal-funds rate has been raised nine times since December 2015. The year-over-year growth in M2 and bank credit peaked in October 2016 and then decelerated sharply thereafter. Meanwhile, the velocity of money fell sharply. Also, symptomatic of the monetary restraint, the yield curve flattened dramatically, with parts of the curve inverting. Moreover, the fall in the monetary base resulted in an unprecedented contraction in world dollar liquidity that led to monetary decelerations in Europe, Japan and China and from there to a synchronized global economic slowdown.

The Fed appears to have a high sensitivity to coincident or contemporaneous indicators of economic activity, however, the economic variables (i.e., money and interest rates) over which it has influence are slow moving and have enormous lags. In the most recent episode, in the last half of 2018, the Fed raised interest rates twice in reaction to strong mid-year GDP numbers. These actions were taken despite the fact that the results of the Fed’s previous rate hikes and monetary deceleration were beginning to show that they were actually slowing economic growth. It appears that history is being repeated—too tight for too long, slower growth, lower rates.

As a result of these considerations, we conclude that the Fund’s investments in long-term U.S. Treasury securities are appropriate.

Thank you for the opportunity to manage your assets.


Van Hoisington, V.R. Hoisington, Jr. and David Hoisington



**The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage-backed securities (MBS) (agency fixed-rate and hybrid adjustable-rate mortgage [ARM] pass-throughs), asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) (agency and non-agency). You cannot invest directly in this or any index.

A credit aggregate measures the stock of bank loans outstanding at a point in time.

The federal-funds rate is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight. It is the interest rate banks charge each other for loans.

The Federal Open Market Committee (FOMC), a component of the Federal Reserve System, is charged under United States law with overseeing the nation’s open market operations. Open market operations are the means of implementing monetary policy by which a central bank controls the short-term interest rate and the supply of base money in an economy, and thus indirectly the total money supply.

Gross domestic product (GDP) is a basic measure of a country’s economic performance and is the market value of all final goods and services made within the borders of a country in a year.

M2 money supply consists of currency and checking accounts, consumer-type time and savings accounts and equivalent near monies, while M3 money supply consists of M2 plus business-type time deposits and less liquid near monies. Both M2 and M3 exclude monies and near monies owned by the Treasury, depository institutions and foreign banks and official institutions and IRA and Keogh balances owned by consumers.

A monetary aggregate measures the stock of money outstanding within an economy at a point in time.

The monetary base is the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank’s reserves. This measure of the money supply typically only includes the most liquid currencies.

The velocity of money (V) is defined as the rate at which money circulates, changes hands or turns over in an economy.

The yield curve is a line on a graph that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares three-month, two-year, five-year and 30-year U.S. Treasury securities. This yield curve is used as a benchmark for other interest rates, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

Bloomberg Barclays US Aggregate Bond Index covers the U.S. investment grade fixed rate bond market, including government and corporate securities, agency mortgage pass-through securities, and asset-backed securities. To be included in the index the security must meet the following criteria: must have at least one year to final maturity, regardless of call features; must have at least $100 million par amount outstanding; must be rated investment grade or better by Moody’s Investors Service, Standard & Poor's, or Fitch Investor's Service' must be fixed rate, although it can carry a coupon that steps up or changes to a predetermined schedule' must be dollar-denominated and nonconvertible. All corporate and asset-backed securities must be registered with the SEC and must be publicly issued. 

You cannot invest directly in indexes.

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