Templeton Says U.S., Japan Debt ‘Bad Value’
Franklin Templeton Investments said the debt of countries including the U.S. and Japan is expensive as their central banks implement easing measures that tend to drive down their yields and currencies.
Templeton, which manages $782 billion in assets, sees Italian debt as a viable alternative to U.K. gilts and German bunds, whose yields dropped to all-time lows last year, according to John Beck, the London-based co-director of global fixed income. Among Asian nations, notes of Singapore and Malaysia offer opportunities for yield, said Beck.
“The bond markets of countries whose central banks are trying to debase their currencies are pretty bad value,” Beck said in an interview in Singapore yesterday. “People are paying too much for so-called security.”
Federal Reserve Chairman Ben S. Bernanke signaled this week that he isn’t close to easing up on buying $85 billion in securities a month to cut the U.S. unemployment rate of 7.8 percent, helping extend the U.S. dollar’s 2012 decline versus its major peers. His Japanese counterpart Masaaki Shirakawa announced on Jan. 22 open-ended asset purchases beginning next year, contributing to a 6.9 percent one-month loss for the yen, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
Ten-year U.S. Treasury yields were at 2 percent as of 6:05 a.m. in London, down from the 2012 peak of 2.4 percent reached in March. The rate on similar-maturity Japanese government bonds fell 19 basis points, or 0.19 percentage point, in the past 12 months to 0.77 percent, according to prices compiled by Bloomberg.
Minutes of last month’s Bank of England meeting released on Jan. 23 showed officials voted 8-1 to hold their bond-buying plan at 375 billion pounds ($595 billion), citing “substantial headwinds to recovery.”
The U.K.’s 10-year yield closed two basis points lower yesterday at 2.1 percent, after declining to a record 1.407 percent in July. Its German counterpart was at 1.68 percent, about half a percentage point from the historic low of 1.127 percent reached in June.
Borrowing levels in major developed nations also pose a “long-term problem,” Beck said. The International Monetary Fund estimates Japan’s net government debt will climb to 145 percent of its gross domestic product this year, almost twice the amount seen in 2006. That of the U.S. and the U.K. will both comprise 88 percent of their respective economies, according to the Washington-based lender.
“In Europe, Italy is riskier because it has high debt-to- GDP,” Beck said. “But in the middle of last year, investors received yield to compensate for that risk. Spreads have normalized a bit now, but it still offers good value.”
Italy’s 10-year notes offered as much as 462 basis points over similar-maturity German bunds in July last year, when the nation’s credit rating was lowered two levels to Baa2 by Moody’s Investors Service. The gap between the two has since narrowed and reached 181 basis points on Jan. 29, the least in almost 1 1/2 years. The nation’s debt-to-GDP ratio will be at 104 percent this year, IMF estimates showed.
Beck also favors higher-yielding assets from Singapore and Malaysia. The rate on 10-year securities of the city state, which is one of only eight nations with the top score and a “stable” outlook from all three main credit assessors, climbed on Jan. 30 to 71 basis points over its Japanese counterparts. That’s the highest since September.
Beck’s $38.9 million Templeton Global Aggregate Bond Fund (FTAAMDU), which he manages together with David Zahn, has 30 percent of its assets in the U.S., followed by 9.9 percent in the U.K. It climbed 7.2 percent in the past year, beating 48 percent of its peers, according to data compiled by Bloomberg.
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