COPENHAGEN (Reuters) – Markets and policymakers could be making a mistake in assuming inflation will stay low for ever, bond investor Michael Hasenstab said on Tuesday, warning investors needed to be prepared for what could be a very challenging environment ahead.
Hasenstab who oversees a number of bond investment strategies at Franklin Templeton, made a name for himself with contrarian bets in the past on unloved markets such as Ireland and Ukraine, which then yielded huge payouts.
He predicted as recently as March that U.S. Treasury yields were set to go higher, and that the Federal Reserve could not be excluded from raising interest rates further.
So far though, 10-year U.S. yields have slipped, their fall accelerating recently as the Fed signalled readiness to cut rates as early as July due to slowing growth and inflation.
While the Fed has struggled for a decade to meet its inflation target and forward inflation swaps are signalling sub-2% inflation for years ahead, U.S. unemployment levels are near five-decade lows.
Speaking in Copenhagen, Hasenstab said wage inflation was ticking higher and was likely to do so further.
“The cyclical and structural factors on inflation from the labour market are real and we shouldn’t ignore them just because they haven’t been in the past,” he told a conference.
“We should at least question the possibility that maybe this low inflation environment won’t last forever.”
Hasenstab made no specific reference to his current investment strategy but said portfolio managers needed to “think of a world that might be different” because of risks stemming from deficits, unconventional policies, populism and the lack of policy tools to tackle the next recession.
“I think this issue of moral hazard, believing that central banks can solve every world problem when they’ve already fired most of their bullets is something we should question when we’re building our own portfolios,” he said.
“What we have opted to do is build a portfolio we think can actually hedge some of those risks,” he said.
He was “doubling down on some experiments,” he said, but did not elaborate.
Hasenstab’s Global Bond Fund which is one of the best performing in its category over a ten-year period had returned 2.5% this year as of May.
However, assets under management are around $34 billion, versus almost $70 billion four years ago, possibly due to outflows from emerging debt in recent years.
(Reporting by Stine Jacobsen in Copenhagen, writing by Sujata Rao in London; Editing by Dhara Ranasinghe)