Take 5: Franklin Templeton's Michael Hasenstab says fixed-income yields 'artificially distorted'

Five candid responses on the Fed, interest rates, the Brexit vote, the fate of bonds and summiting Mount Everest.
JUN 24, 2016
Michael Hasenstab, manager of the $48 billion Templeton Global Bond Fund (TPINX), holds out hope that the Federal Reserve will find a way to justify a rate hike, which will effectively underscore his strategy for higher rates. In the meantime, he's applying the patience of the seasoned mountain climber that he is to navigate the geopolitical implications of everything from the upcoming Brexit vote to the spread of negative interest rates. InvestmentNews: How significant is the Brexit vote for U.S. investors and U.S. markets? Mr. Hasenstab: It's quite important for global markets and certainly U.S. investors in Europe. If Brexit happens it signals more political changes to come, and we are going to revisit the issues we had in 2011 about questioning whether the eurozone should stay together. It's certainly not our base case that it breaks apart. But it's definitely our base case that the debate intensifies. InvestmentNews: What does the presence of negative interest rates around the world say about the health of policy making by central banks and global markets? Mr. Hasenstab: I question whether negative rates are the best policy tool, because ultimately they just tax savers and investors, and put pressure on banks and insurance companies. And they certainly are distorting bond markets, and forcing investors out the risk spectrum. In terms of global markets, it says conditions in Europe and Japan are worse and their recoveries are lagging the U.S. They needed extreme measures, which tells you there are problems and that they're not healed yet. InvestmentNews: From a fixed income investing perspective, where do you see the biggest risk right now? Mr. Hasenstab: Yields are artificially distorted and could rise. For global investors, we think the yen and euro are overvalued, so they will likely fall in phase two of the dollar adjustment. We had one round of dollar strength because of expectations of Fed hikes. Phase two is when you actually get higher rates and prolonged easing in Europe and Japan. Rates are going higher in the U.S. because inflation and growth are not consistent with where Fed policy should be, and not consistent with where yields should be. InvestmentNews: Your fund has been trailing both the Morningstar world bond category and Barclays U.S. Aggregate Bond Index benchmark since 2014. Can you explain what's happening? Mr. Hasenstab: Quite simply, we have been buying into emerging markets that were under pressure. That only recently started turning into a tail wind. Second, we have taken a view that rates are going higher in the U.S., which is why our fund's duration is close to zero while our peer group and the index has a duration of six, seven or eight years. Recently the yen has been strong and that has also put pressure on performance. We look at it on an absolute return basis. The year-to-date small downside has allowed us to invest in very distressed emerging market assets. We've been investing in falling markets that have only fallen a few percent, but what we've accumulated is down 30-40%, so there's lots of potential upside. InvestmentNews: As an accomplished mountain climber, what would you describe as your most challenging experience? Mr. Hasenstab: When I was on Everest in 2013 we were preparing for the climb by doing acclimatization hikes at 24,000 feet without oxygen. I've never experienced anything physically more difficult, which also became mentally difficult. The most memorable part of it is the humility that one has to have being on a mountain of that size and significance. Reaching the summit of Mount Everest requires patience, because it doesn't happen in a day. The whole Everest experience takes two months, but the training takes about five years.

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