Star bond trader Michael Hasenstab warns 'a lot of pain' is on the way

Photo by Gonzalo Arroyo Moreno/Getty Images

Franklin Templeton’s Michael Hasenstab, the man responsible for the top performing bond fund over the past decade according to Morningstar, has a message to his brethren in the bond market: you aren’t ready for rising US interest rates.

Speaking to Bloomberg, Hasenstab suggested that many of his peers had become complacent, buoyed by the belief that deflationary forces will keep bond prices strong for the foreseeable future.

“A lot of investors have gotten very complacent and comfortable with the idea that there’s global deflation and you can go long rates forever,” said Hasenstab.

“When that reverses, there will be a lot of pain in many of the bond markets.”

Hasenstab, whose contrarian investment approach has delivered annualised returns of about 8% over the past decade according to Bloomberg, said the funds portfolio has a negative duration in the US, meaning he’s positioned to make money from rising interest rates.

Many investors “have a lot of interest-rate risk in their portfolios,” Hasenstab told Bloomberg. “We’ve taken a much different tack.”

Later this month the US Federal Reserve will hold its December FOMC meeting, an event in which many analysts believe will see the committee raise the benchmark Fed funds rate for the first time since June 2006.

That view was further bolstered by US Federal Reserve Chair Janet Yellen overnight who told the Economic Club of Washington that “were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”

The hawkish remarks sent US 2-year treasury yields to the highest level since mid-2010, subsequently pushing the US dollar index to highs not seen since early 2003.

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