Hasenstab: Little Value in U.S. Treasuries Right Now
January 29, 2013

The financial markets may have let out a collective sigh of relief on January 1 when U.S. politicians managed to avoid falling off the fiscal cliff, but the fact is the fundamental issue plaguing the U.S. still hasn’t been addressed – mounting debt. As a result, Dr. Michael Hasenstab, co-director of the International Bond Department, says he simply doesn’t see much value in U.S. Treasuries right now. He does see it elsewhere in the world, though, including Ireland and select emerging markets where fiscal houses appear in much better order.

Kicking the Can

Hasenstab predicted politicians would likely “kick the can down the road” rather than deliver a comprehensive deficit reduction plan when the calendar turned to a new year, and that’s what essentially happened. U.S. politicians still haven’t addressed the fundamental financing issues the nation faces. Here’s Hasenstab’s take on the situation—and what it means for U.S. Treasuries.

Michael Hasenstab

“Our central scenario is that U.S. economic growth will be around 2%, which is not great but it’s certainly not a collapse. That will provide some bedrock of global stability. In terms of U.S. Treasuries, we would need to see much higher yields combined with a lot better fiscal policy for us to find value in them. Right now U.S. Treasuries in our view are being artificially suppressed in terms of yield and artificially inflated in terms of price because our government—through the Federal Reserve Bank—is buying a lot of those assets, and there was a panic about Europe that forced a lot of buyers into this market.

We think both those sources of buyers should eventually dissipate. The Fed can’t buy forever. And, things in Europe—while troubling in terms of entering a protracted period of slow growth—don’t look near the type of critical condition that we saw a year or two years ago. So that buyer base seems like it will increasingly be absent; that makes U.S. Treasuries vulnerable, in our view.”

That said, Hasenstab believes one of the biggest risks globally right now is on the political policy side, but it doesn’t seem to be a near-term crisis scenario.

“The U.S. economy has shown signs of stabilization, albeit at a fairly weak level. China didn’t face the hard landing in 2012 that everyone was afraid of… So I think we’re starting 2013 on decent economic footing, which is the good news.”

“Politicians in Europe need to move forward with fiscal union, with banking union, with more political cohesion. In the U.S., we have to deal with the deficit issue. Those are still on the horizon and do present some risk events but they tend to be longer-term issues. However, I think in the U.S. and Europe and globally, we have seen progress toward a more sustainable global economic picture. The “Armageddon” scenario in Europe didn’t materialize and looks even less likely as a probable outcome. The U.S. economy has shown signs of stabilization, albeit at a fairly weak level. China didn’t face the hard landing in 2012 that everyone was afraid of and shows signs of growth stabilization and even some slight uptick. So I think we’re starting 2013 on decent economic footing, which is the good news.”

Greener Pastures in Ireland, and EMs

Hasenstab’s well-publicized views on Ireland have been praised by some and criticized by others in financial circles. That doesn’t bother him a bit. He has remained steadfast in his convictions about the country, and saw some vindication as Ireland was able to re-enter the bond market after a two-year absence. Moreover, the Bank of Ireland has forecast economic growth of 1.5% in 2013, which would outpace the EU at large, based on various current predictions.

Ireland I think really embodies the Franklin Templeton investment philosophy: do a lot of fundamental research, identify good value and buy something when everyone else hates it. That was the Irish story. I think it attracted so much attention because most of the market disliked it and frankly it was a good sign that we are doing our job; we were out of consensus. The fundamentals there continue to improve, although Ireland is nowhere back to where it could be—and probably will be in our view. Most recently, its success was embodied in its 2017 bond auction in January, which had over €7 billion in demand and the buyer base was quite broad. It shows that Ireland can finance in the market.”

While he’s not so keen on the U.S. (or Japan for that matter) from a fixed-income standpoint, Hasenstab is optimistic about many other areas of the world in his global investment quest.

“There are a lot of countries which are running more responsible fiscal policies, their growth is stronger, they are offering us higher interest rates and the currencies are not being debased. Places in Asia, whether it be (South) Korea, Malaysia or Singapore, and places in Europe such as Sweden or Poland, for example. We are finding opportunities in emerging markets in particular. These countries have come a long way over the last decade. Their debt levels are generally lower than developed markets, growth is generally stronger, and the level of corporate governance has improved dramatically.”

For this globe-spanning American investor, maybe it’s a good thing that there’s no place like home.


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What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. When interest rates rise, bond prices fall, and the converse is true.

Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.