Templeton Deepens Bearish Treasury Bet and Wall Street Divide

(Bloomberg) -- Michael Hasenstab’s contrarian bet against U.S. Treasuries just got even bigger.

The Franklin Templeton money manager, known for staking big chunks of his portfolio on conviction trades, has reduced average duration in his $38 billion flagship Global Bond Fund to a record low. The position protects against a spike in bond yields, an event Hasenstab has been predicting since at least 2016.

The fund’s average duration -- a measure of how sensitive bond prices are to rising rates -- fell to -0.85 years at the end of March, filings show, down from -0.38 years at the end of 2017. The Citigroup World Government Bond Index the fund uses as a benchmark has an average duration of about 7.82 years.

While Hasenstab’s bet against Treasuries showed some signs of paying off earlier this year when 10-year yields reached a four-year high of 2.95 percent, they’ve since retreated as the threat of a tit-for-tat trade war between the U.S. and China led investors to shun risk.

Templeton’s view puts them at one end of a deepening divide in financial markets on the outlook for Treasuries. Analysts at Morgan Stanley are betting that economic and political risks may keep yields capped for some time and are telling investors to boost duration amid rising trade tensions, a downturn in equity markets and subdued inflation.

In an April 6 note strategists including Matthew Hornbach said “global bond market duration has not looked this attractive in over two years.”

Hasenstab, who said earlier this year he’s using interest-rate swaps to bring his duration below zero, is nevertheless outperforming peers. His flagship fund has returned 1.38 percent in 2018, beating 64 percent of similar funds, according to data compiled by Morningstar Inc.

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