Buying long-term bonds may be the most unpopular trade right now on Wall Street, but you should consider it nevertheless.

That's not just because of contrarian analysis' first principles, which hold that "when everyone thinks alike, everyone is likely to be wrong" (to quote Humphrey Neill, widely considered the father of contrarian analysis). It's also because the rationales investors are giving for avoiding long-term bonds don't withstand scrutiny.

Consider what is perhaps the most commonly cited rationale: The inflationary impact of federal government debt, which earlier this month eclipsed the $40 trillion mark. The interest cost on that debt is now the largest single line item in the federal budget, fueling worries about an out-of-control debt spiral. Though these are very real concerns, it's not clear they have the bearish significance that bond traders are assuming.

After all, as Wes Crill, a vice president at Dimensional Fund Advisors, points out, debt level concerns have been around for a while. But, Crill argues, the size of the government's debt and its associated interest burden are already reflected in bond prices. The inflation threat that many bond investors face is from unexpected inflation-which, by definition, is unexpected.

Support for Crill's argument comes from inflation swaps, which are fixed income derivatives whose interest rates are pegged to future inflation. Inflation swap rates have not only not risen significantly in recent months, they are even slightly lower today than they were several months ago, when the $40 trillion federal debt mark hadn't yet been eclipsed. The same story is being told by another measure of expected inflation-the so-called break-even inflation rate, which is the difference between yields on nominal Treasuries and yields on the Treasury's Inflation-Protected Securities, or TIPS.

Another argument some are advancing to justify lower prices for bonds is that they are far more volatile than in years past. This argument would have validity if bonds' expected volatility had in fact increased, since bond investors require higher yields to compensate them for increased volatility. But expected volatility has fallen, not risen.

Consider the MOVE index, which stands for Merrill Option Volatility Index, and which is often referred to as the "VIX index for bonds." Just as the Cboe Volatility Index, or VIX, measures expected volatility for the S&P 500, the MOVE index uses option prices to calculate expected volatility in the Treasury bond market. As you can see from the accompanying chart, the MOVE index has been steadily declining for nearly five years.

Another argument some bond bears are making is that projected economic growth is rising markedly because of artificial intelligence, and higher economic growth rates are correlated with higher real (inflation-adjusted) interest rates. But this argument doesn't hold water, even if we take at face value the assumption that AI will lead to much faster economic growth. That's because higher economic growth rates historically have not been correlated with higher real rates, according to Bruce Hansen, a University of Wisconsin-Madison economics professor. He says that he has found from his research that the correlation historically has actually been slightly negative-and he sees no reason to expect the historical relationship to change.

Implications for bond investors. The upshot of these historical precedents is the distinct possibility that today's high interest rates-especially high real rates-will decline in coming months. When real rates decline, of course, TIPS investors profit-particularly in long-dated TIPS. Their yields are at multiyear highs. And if we use the Cleveland Federal Reserve's Inflation Expectations model to calculate real rates, the nominal 30-year Treasury is currently yielding more than at any time in the last 20 years.

Edward McQuarrie and William Bernstein conclude that "the time to buy TIPS is now." McQuarrie is an emeritus professor at Santa Clara University's Leavey School of Business, and Bernstein is a former neurologist turned money manager and founder of EfficientFrontier.com, an investment advisory firm. In an article for the Advisor Perspectives newsletter in August, they wrote: "In late 2008, TIPS yields rose past 3%, a juicy rate that lasted barely a month. By 2010, yields had fallen below 2%; by 2011, below 1%; and just before inflation exploded and the Fed tightened in 2021, the five-year TIPS yield fell to minus 1.76%, and even the 30-year sported a negative yield. As we write this, long TIPS yields once again yield 3.0% and, as in 2008, these rates may not last long. That means: You snooze, you lose."

Mark Hulbert is a regular contributor to Barron's. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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