Opinon

Franklin Templeton Expect US Yields to hit 3%

Sonal Desai, Chief Investment Officer of Franlin Templeton’s $152 billion fixed income group, still believes that US Yields to climb back toward 3% because “markets will realise that the economy is as strong as it was last November, when 10-year yields were above 3%.

Here is the recap of Bloomber New’s Vivien Lou Chen caught up with Desai to get her latest perspective after Federal Reserve Chair Jerome Powell effectively locked in a July interest-rate cut:

While much of the Wall Street crowd sees a decline in yields, [Desai] believes Treasury 10-year rates could jump toward 3% by year-end from just above 2% now. That should happen as a stream of solid reports prompts a swift reappraisal by investors of the economy’s health, she said.

“Can the 10-year yield get to 2.50%, 2.60%, 2.75% this year? Why not?” she said. The economy is in “incredibly good health,” she added, pointing to the better-than-estimated 224,000 jump in U.S. payrolls in June. Desai is finding “select” opportunities in U.S. corporate debt rated triple B that will do well under a scenario of rising yields.

Franklin Templeton is taking a contrarian stance on the direction of interest rates.  It might be worth noting that the fundamentals of the global macro environment might be subtly changing as follows:

  1. Germany this week issued 10-year debt that doesn’t pay interest, and at a price higher than the principal it’ll pay back at maturity in 2029.
  2. Investors lined up to buy 50-year Italian securities at a yield of less than 3%.
  3. Investors are willing to buy Austrian century bonds at 1.17% and also 100-year obligations from Argentina and Mexico.
  4. Some junk-rated European corporate bonds had sub-zero yields at one point.

From my perspectives, I think if the trade war between US and China were to continue, US’s economy would be affected.  For that, it can be a challenge for the US Yields to climb back 3%.

Further to that, most bond’s guru like Michael Hasenstab, Jeffrey Gundlach, Daniel Fuss etc…were all wrong in their prediction that US yields would be at 4% or higher in 2018!

Reference

Bloomberg, Brian Chappatta, 2019-07-13, “U.S. Yields at 3%? Franklin’s Making Too Much Sense”

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