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Franklin Buys Credit, Shuns Bunds on Bets Against Deep Recession

Franklin Templeton Investments favors corporate bonds on prospects global growth will be driven by sustained expansion in China, and is betting yields on German bunds and U.S. Treasuries have fallen too low.

Credit markets are “too pessimistic” given Europe and the U.S. aren’t likely to suffer deep recessions, helping sustain growth in export-driven emerging economies, said David Zahn, who helps oversee $694.1 billion in assets at Franklin Templeton as a London-based portfolio manager in the fixed- income group. Debt sold by industrial companies in Europe and the U.S. is attractive, while some government bond yields have reached levels too low to be sustainable, Zahn said.

“A lot of what’s been going on recently, we see more as noise, as opposed to fundamental changes,” he said. “We are positioned relatively bullishly.”

China is heading for growth in excess of 8 percent next year, and along with most Asian nations has fiscal scope to cushion its economy from an escalation in Europe’s debt crisis, the World Bank said Nov. 22. The report signals that Asia, which led the world out of the 2008-2009 recession, is poised to withstand the blows from any slump in demand for its exports or pull-back in credit by European banks.

U.S. gross domestic product climbed at a 2 percent annual rate from July through September, the Commerce Department said yesterday. It is expected to expand 2.2 percent next year while the euro area grows 0.5 percent, according to economist forecasts compiled by Bloomberg.

“If you look at the macroeconomic fundamentals, they’re still doing what you would have expected,” Zahn said.

Yields Too Low

Government bond yields are too low as central banks worldwide buying bonds in so-called quantitative easing may help spur inflation, he said. The U.S. Federal Reserve may instigate further stimulus if unemployment doesn’t drop, according to Zahn.

Some Fed policy makers said the central bank should consider easing policy further, according to minutes of their Nov. 1-2 meeting released yesterday. The Bank of England expanded stimulus for the first time since 2009 last month.

Monetary easing and concerns that U.S. attempts to rein in spending and Europe’s crisis will damp global growth, helped push sovereign bond yields in the U.S. and Germany to record lows in September.

The difference between 10-year Treasury yields and the inflation rate, known as the real yield, was minus 1.60 percentage points yesterday. The figure was minus 2.11 in October, the least since at least 1992.

Corporate Premiums

Yield premiums on global industrial debt compared to sovereign notes increased 53 basis points since June 30 to 188, according to Bank of America Merrill Lynch indexes.

Of 463 companies in the S&P 500 Index that have reported quarterly net income results since Oct. 11, 311 beat analysts’ consensus forecast, according to data compiled by Bloomberg.

The default rate on global speculative-grade debt is set to fall to 1.4 percent by the end of the year, from 1.9 percent in October, Moody’s Investors Service said Nov. 8.

“Credit is a buy,” Zahn said. “Spreads are quite attractive in both Europe and the U.S.”

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

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net; Rocky Swift at rswift5@bloomberg.net

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