U.S. Treasurys, an oasis of yield amid a global desert of low returns, are not a safe haven for fixed-income investors, said Michael Hasenstab, Franklin Templeton’s executive vice president and chief investment officer of global bonds.
“Though the market is falling toward U.S. Treasurys as a safe haven, that could prove a very unsafe decision,” Hasenstab said. “We think the U.S. Treasury valuations are nowhere near justified by market fundamentals and macroeconomic conditions.”
Speaking at the Morningstar Investment Conference in Chicago on Monday, Hasenstab said that U.S. interest rates are likely to be driven higher by market factors or by the sheer will of the Fed. Therefore, he said, treasuries are not the secure investment that many international and domestic investors believe them to be.
Instead, Hasenstab favors investing in emerging market debt. But he warned that not all emerging markets are created equal.
“There are exciting opportunities in emerging markets, but all of this hinges on our views of China,” Hasenstab said. “We’ve been of the view that China is headed for a soft landing.”
Hasenstab is noted for contrarian calls on Ukranian and Irish debt in recent years, where big bets led to attractive returns for investors. On Monday, he singled out Brazil as an area of opportunity for fixed-income investors.
“Brazil was in a situation where things got worse, but they still don’t have a lot of external debt,” Hasenstab said. “We think they have time to get the fixes right.”
After arguing that China could turn the corner on its demographic challenges and stabilize in the short term, Hasenstab also singled out Mexico, the Philippines and Indonesia as countries that presented opportunities for investors, while warning against Turkey and Venezuela.
In the near term, foreign investment from low or negative rate regions like Japan and the EU is likely to keep Treasurys afloat, even as inflation begins to increaase.
At the same time, the dollar is likely to strengthen against the euro and the yen, buoyed by continued quantitative easing and accommodative monetary policies in Europe and Japan, said Hasenstab.