As Wall Street trumpets this relentless era of ultra-cheap money, contrarian Sonal Desai has a warning for her peers plunging into long-dated debt like no tomorrow.
“Markets are over-estimating the Fed’s ability to anchor long-end rates -- they’re also over-estimating the Fed’s fear about the underlying real economy,” said the chief of Franklin Templeton Investments’ $150 billion fixed-income unit.
She reckons one more interest-rate hike is in the cards in 2019, shrugging off market projections that growth and inflation are slowing. The firm’s debt titan sees 10-year U.S. Treasury yields climbing to 3 percent or more this year, even as traders tank up on dovish monetary bets.
“I know that puts me beyond being in a minority, it puts me way out there, off the reservation so to speak,” she said in an interview in London. While many strategists and money managers sound cautious on interest-rate risks after the rally in recent months, yields tell another story. “If it’s a consensus view that people don’t like duration, my question is, who on Earth bought this stuff?”
The fear of stoking asset bubbles should weigh on monetary policy makers, Desai warns. It’s an eye-catching worldview for a benchmark-orientated manager who lacks the full flexibility to snub the herd. From her perch in San Mateo, California, she’s acutely exposed to all manner of interest-rate risks across her portfolios from Treasuries to credit, emerging markets and loans.
But “way out there” is a comfortable place for the investor.
Before taking over the fixed-income portfolio at the end of last year, she helped manage the Templeton Global Bond with Michael Hasenstab, a famous contrarian in the world of debt investing. Together, they staked billions shorting duration in a wager longer-dated yields will break out from their post-crisis slumber.
Several funds in the broad fixed-income unit are running duration lower than the benchmark, while the Franklin Strategic Income has a duration of about 3.5 years, some two years shorter than the index.
“Right now, I think markets are wrong in assuming the next rate move from the Fed would be a cut,” Desai said.
She cites the favorite recipe of die-hard bond bears: Sustained price growth and a relatively tight labor market -- ingredients that have hitherto largely failed to serve up a sustained sell-off over the years.