Franklin's Hasenstab Says Buy Dollar Versus Yen on Widening Yield Spread

Investors may profit in 2011 by buying the U.S. currency against Japan’s as the yield difference between the two nations’ bonds widens in favor of the dollar, according to Franklin Templeton Investments.

U.S. yields will climb amid an economic recovery and concern over the size of the government’s borrowing program, wrote Michael Hasenstab, who runs the $43.7 billion Templeton Global Bond Fund in San Mateo, California. They will also rise as the Federal Reserve’s Treasury-buying program nears an end and markets speculate about the central bank’s ability to reduce its balance sheet before inflation builds, he wrote in a report detailing Franklin Templeton’s 2011 outlook.

“There can be opportunities to potentially capitalize on rising yields in the U.S. by positioning long the dollar against the Japanese yen,” Hasenstab wrote. “There has been a strong correlation between the bilateral exchange rate and the difference between yields in the U.S. and Japan, and we expect this relationship to continue given the very large investment flows involved.”

The dollar traded at 83.85 yen as of 6:55 a.m. in London after rising to 84.51 yen on Dec. 15, the strongest level since Sept. 24. The greenback has weakened 9.8 percent against the yen this year.

The Templeton Global Bond Fund has outperformed 97 percent of competitors over the past five years, according to data compiled by Bloomberg.

Wider Spreads

Two-year Treasuries offered investors as much as 44 basis points in extra yield on Dec. 15 over similar-maturity Japanese government securities, the most since July 28, according to Bloomberg data. Benchmark 10-year Treasury yields climbed to 3.56 percent on Dec. 16, the highest since May 13.

Franklin Templeton expects yields to climb in most countries as the global economy recovers, Hasenstab wrote. To protect against losses on global bond portfolios, he said his investment team “significantly reduced” average durations this year, and had no holdings of Treasuries and Japanese bonds and minimal investment in eurozone debt at the end of September.

Hasenstab said he favors short-maturity bonds in countries such as Australia, Israel and South Korea. These positions will likely benefit due to currency gains, he wrote.

“We expect that the currencies of economies with relatively strong growth, where policy is likely to be tightened over the short term, should appreciate against the currencies of the G-3, where monetary policy is likely to remain loose over an extended period,” according to Hasenstab.

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net; Candice Zachariahs in Mumbai at czachariahs2@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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