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  • 00:00What do you do with Treasuries you're shorting right now. Yes it's probably in our view one of the biggest financial bubbles out there. If you look at economic growth you look at inflation you look at foreign buyers that are starting to walk away . These numbers just don't make sense. And it's kind of like walking on a lake and in April and it's still frozen but eventually it's going to crack. So we still have a short position on U.S. treasuries. You got burned. I mean that short position was real rough in the last few months. Everyone that they're running goes short. Then we had a lot of short covering . What's it going to take for your bet to actually pay off . Well I think I'm afraid. I think our time frame is always longer term it's a couple of years. We don't worry about a quarter. So we think over the next year inflation in the US continues to rise. We have a full labor market which is going to lead to inflationary pressures and eventually the Fed will either have to react or the market will do it for them. And I think the danger is increasingly that the market will view the Fed is very behind the curve. You've even heard some serious circles talk about that we should raise the inflation target to 4 percent. So this this could really erode the credibility that the Fed has earned through decades very quickly. And so I think it's just a matter of time. In the Treasury market coupled with domestic forces without decoupling from bunds from J.G. base you know you at rates in Japan had been zero for decades and U.S. rates have been much higher. So I think that is about the only factor that people are sort of hanging their whole risking all their capital on is that rates in other parts of the world are low and therefore they will keep buying our Treasuries. But if you look at the actual data for example China which used to be a huge buyer of U.S. Treasuries has do cumulative about a trillion dollars of their reserves . OPEC countries now are not buying Treasuries they're actually financing because of the low oil prices. So you have a lot of buyers that have actually been pulled out of the market. So I think it's a very tenuous situation. But beyond just the B story The Bond story is just the structural forces the demographics the savings glut that's going to keep downward pressure keep a lid on yields. You don't buy into the structural story either. No you know I think there are some factors there. There's no question. But you know as you were talking earlier I mean the deficits here are are continuing . There's a lot of funding that needs to go on. And as inflationary pressures rise and I think that's why we keep coming back to the growth dynamics and the inflation dynamics and we are beyond full employment it's the first time we've had the number of job openings is exceeding the number of hires that's going on. If you look at some of these immigration policies those are also going to put pressure on the labor markets to to increase wages as shortages of labor will come about. You know those factors at some point will price into the market and go back to October last year everyone was convinced in September rates couldn't go higher and it didn't take much and all of a sudden you had a huge backup. So I think that was the first warning. And it's one of many to come. Go back to the Chinese experience. Why didn't the Chinese experience actually prove exactly the reverse if you would ask two or three years ago what would have happened to U.S. Treasuries if the Chinese government had gotten rid of that many U.S. Treasury bonds you would have predicted it would have been really dire . It wasn't. Doesn't that prove perhaps to Jonathan's point there are other factors such as demographics and things that actually will support U.S. treasuries despite the Chinese government selling off. Well I think when you have a Fed that's behind the curve they give a lot of U.S. based investors confidence that they can keep buying these assets even though they're in a bubble. I do think you know we have seen a move meaningful moves since you know six months ago higher in Treasuries and I think part of that is you have a buyer base that is that is weaning off of off of the market. But people have been buying U.S. Treasuries consistently buying U.S. treasuries despite what's happened here. How much of this is the reflation trade . I mean they're looking for opportunities to really invest in safe returns so they're getting safe returns. Well they didn't get safe returns in the fourth quarter of last year. In fact most investors who were long you know Treasuries lost about 10 percent of their capital in a heartbeat. So I think the reality is going to start to set in that this isn't necessarily a safe haven asset because there's a tremendous amount of principal risk when you're buying a U.S. Treasury. You know two and a half percent. You know most three and a half percent you've lost 10 percent of your principal where in the core of your shorting mostly 10 and 30 year was it what happens to the curve . I think we have well two scenarios one is that if the market starts to think that the Fed is really behind the curve and inflation starts to pick up then you could see the whole curve steep . Because those long duration assets could come under a lot of pressure if the Fed starts to get not ahead of the curve but starts to to be a bit more appropriate in their rate hikes then you could see just the whole curve ise you know sort of whether it's a flattening but probably rates go higher across the curve rising platinum. Yeah. Help me understand then how your view fits in to the Fed and when they sort of end their reinvestment policy at the same time our treasury is probably going to have to issue because we have a deficit here because we need to fund infrastructure. How does that scenario fit into your short view . Well I think as I said it's going to be one of two ways It's either the Fed starts to react to what economic data is telling them to do and they will have to hike and that moves things higher or it's they don't do anything and at some point the market loses confidence and then there be a far worse scenario going to tell Europe that just a moment. The final question here what's more other value treasuries or bonds probably treasuries right now .
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Hasenstab Says Treasuries Are in Bubble That's Set to Pop

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April 25th, 2017, 6:01 PM GMT+0000

Franklin Templeton star bond-fund manager Michael Hasenstab discusses the outlook for Treasuries and his investment strategy with Bloomberg's Alix Steel, Jonathan Ferro and David Westin on "Bloomberg Daybreak: Americas." (Source: Bloomberg)


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