Templeton Doubts Bond Catastrophe as Western Says Rally Not Dead

  • Current selloff doesn’t mark ‘structural turn’ in rates: Beck
  • Western Asset’s Abad says ‘this bond story is not dead’

Reports of the global bond rally’s demise are greatly exaggerated. That’s the view of both Franklin Templeton Investment Management and Western Asset Management, which between them oversee about $750 billion in fixed-income assets.

The selloff that this week drove the benchmark 10-year Treasury yield to its highest level since June and spurred bond losses around the world does not represent a “structural turn in interest rates” and “powerful forces” such as central bank asset purchases continue to weigh on global yields, Templeton’s John Beck said Wednesday in Sydney. Western Asset Management’s Robert Abad said that there’s still potential for bonds “to generate good returns.”

Volatility in debt markets surged after European Central Bank President Mario Draghi last week damped speculation policy makers are poised to increase stimulus. Shifting expectations about when the Federal Reserve will lift its key rate have whipsawed markets as well and speculation is also mounting that the Bank of Japan will limit its purchases of long-term debt. While such uncertainty has pushed up global sovereign bond yields and encouraged money managers to ramp up cash holdings, interest rates remain within half a percentage point of record lows.

“This bond story is not dead by any means,” said Abad, a Western Asset Management product specialist based in Pasadena, California. American growth and inflation are likely to remain “muted” and betting that U.S. interest rates will remain structurally low “is a good trade,” he said in an interview on Wednesday in Sydney.

With countries fighting deflation and sluggish economic growth, central banks globally are years away from raising interest rates and it is “premature” to say bond yields are turning around and going to 3 or 4 percent, according to Beck, London-based director of fixed income at Templeton.

Taking Profit

The benchmark 10-year Treasury bond yielded 1.72 percent as of 9 a.m. in London, having risen from an all-time low of 1.32 percent in July. Similar tenor German debt was at 0.05 percent, while equivalent Japanese notes yielded negative 0.025 percent. The Bloomberg Barclays Global Aggregate Index, a measure of worldwide bond returns, fell 1.3 percent in the four trading days through Tuesday.

After a rally “it is a natural disposition of the bondholders to say: ‘thank you very much, let’s take some profit,’ ” Beck said in an interview. “But where is the catalyst that is immediately going to change the interest-rate path?”

In Europe, Beck said he’s currently favoring bonds from peripheral countries over notes from core nations like Germany. He has a neutral position on U.S. debt and doesn’t like Japanese government bonds.

“Globally fixed income is substantially more expensive than it has been,” Beck said. “But I don’t think that’s necessarily saying an imminent catastrophe is approaching us.”

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