Hasenstab Says Treasuries Are Bubble Set to Burst as Yields Rise

(Bloomberg) -- Franklin Templeton star bond-fund manager Michael Hasenstab called U.S. Treasuries one of the world’s biggest financial bubbles, saying investors seeking safety in the securities face the prospect of significant losses as yields rise.

Treasuries fell for a fifth day Tuesday as yields climbed above 2.30 percent, testing a key support level. Hasenstab, who manages the $40 billion Templeton Global Bond Fund, cited a variety of factors behind his bearish wager, from higher consumer prices brought on by a hot U.S. job market, to a Federal Reserve he sees as behind the curve, to the retreat of foreign buyers. It’s a major trade he’s held onto since at least 2015, even as yields tumbled to record lows last year.

Buying Treasuries is “like walking on a lake in April,” Hasenstab said in a Bloomberg TV interview. “It’s still frozen, but eventually it’s going to crack. ”

Things seemed to be working out for bond bears like Hasenstab following Donald Trump’s election in November. Trump’s win helped fuel the reflation trade, with expectations of fiscal stimulus and stronger growth driving a surge in yields. Yet the wager began to sour in March as signs of delays to key legislation and surging geopolitical risks abroad drove investors back to haven assets.

Yields have rebounded this week after Trump promised to deliver long-awaited details on his tax-reform proposal, which may include slashing the corporate tax rate to 15 percent. Some of the haven demand that’s been keeping Treasuries supported is dissipating, after results from the first round of French elections pointed to pro-growth centrist Emmanuel Macron becoming the country’s next president.

"The reality is going to set in that it isn’t necessarily a safe-haven asset, because there’s a tremendous amount of principal risk when you’re buying Treasuries at 2.5 percent," Hasenstab said. He’s particularly bearish on 10- and 30-year Treasuries, where yields declined to record lows last year.

• Benchmark 10-year yields rose six basis points to 2.33 percent as of 4:31 p.m. New York time. While the yield has rebounded from a record-low 1.32 percent in July 2016, it has fallen from the 2.6 percent level reached last month, a threshold some market veterans say could signal the start of a persistent rise in yields.
• Treasuries are also under pressure amid indications that Trump is relenting on his demand that Congress immediately start funding a border wall, potentially averting a government shutdown; a shutdown would benefit the market by casting doubt on administration’s ability to pass tax reform and/or fiscal stimulus, strategists say
• Area between 2.30% and 2.322% on the 10-year is acting as strong support level, independent strategist Marty Mitchell wrote Tuesday
• U.S. economic calendar includes March durable goods orders, 1Q advance GDP this week
• Fed speakers include Harker on Friday

--With assistance from Alix Steel and Edward Bolingbroke

To contact the reporter on this story: Andrea Wong in New York at awong268@bloomberg.net.

To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Mark Tannenbaum