Investors warned to prepare for more market turbulence

Franklin Templeton’s fixed income chief cites entrenched interest rate risk

Robin Wigglesworth, US markets editor


Markets have been turbulent since the start of October


Investors should steel themselves for more “ Red October”-style market tantrums in 2019, as tighter US monetary policy once again hits bond prices and further undercuts support for financial markets, according to Franklin Templeton’s fixed income chief.

Markets have been turbulent since the start of October, when a US government bond sell-off accelerated and sent global equities tumbling. They continued to see-saw lower into the end of the year.

Although renewed investor fears over the health of the global economy has supported bonds again, subduing yields, the calm is unlikely to last, according to Michael Hasenstab, chief investment officer for Franklin Templeton’s global bond funds.

“October was not a fluke,” the prominent fund manager warned in an interview. “There is a lot of entrenched interest rate risk in all financial markets right now.”

The Federal Reserve raised interest rates for a fourth time this year in December. Although the central bank lowered its central forecast for how many times it would lift rates in 2019 from three times to two, investors have taken fright at its determination to keep tightening and shrinking its balance sheet— in spite of mounting opprobrium from president Donald Trump and choppier markets.

The 10-year Treasury yield has slipped back to 2.8 per cent as investors have sought out their relative safety, and the yield on the 30-year US government debt sank below 3 per cent for the first time in almost three months on Wednesday as the Fed’s forecasts showed a lower “neutral” rate in the longer-term. Yields fall when prices rise. 


Michael Hasenstab first gained prominence for massive money-spinning bets on Hungary after the financial crisis and Ireland in the depths of Europe’s debt crisis © Bloomberg


However, Mr Hasenstab predicts that the 10-year yield will smash past the previous high mark 3.23 per cent touched in October and climb to 4 per cent by the end of 2019, as the Fed is likely to stick to its current path rather than pause its rate increases, as many investors expect.

“I don’t know what they will do, but I know what they should do, and that is to keep raising rates,” he said. “It is better to have these periodic downturns than procrastinating and have to move even more aggressively later on.”

Franklin Templeton’s bond chief argues that the combination of “slowing but not collapsing” economic growth, faster inflation and the Fed trimming its heft at a time when the US government deficit is swelling and other Treasury buyers like China are tiptoeing away will resume the sell-off.

Mr Hasenstab first gained prominence for massive money-spinning bets on Hungary after the financial crisis and Ireland in the depths of Europe’s debt crisis. His performance has tailed off since, but he has bounced back in 2018 as the Fed’s interest rate increases and balance sheet shrinkage finally began to produce the turbulence he has long predicted.

His main fund, the $35bn Templeton Global Bond Fund, was earlier this year battered by big investments in Argentina, but the country’s tentative stability, coupled with aggressive bets against the euro and US Treasuries has produced a 1.6 per cent gain this year.

That compares with the global bond market’s 2.2 per cent loss in 2018 — one of the worst performances in decades — and puts the fund in the top decile of more than 300 similar funds tracked by Morningstar, the data provider.

“We built this portfolio to produce gains when markets are weak,” Mr Hasenstab said. “We know that printing money has pumped up asset prices, and it’s only natural that when this is reversed it deflates them.”

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