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Losing 1.8bn in a single day wasn’t enough for Hasenstab, now has biggest bet against treasuries of any major global bond fund

Franklin Templeton and Hasenstab dividing global opinion with latest bet.

Losing 1.8bn in a single day wasn’t enough for Hasenstab

Last week the financial world was stunned as Franklin Templeton headed by Michael Hasenstab lost $1.8bn after Argentina’s market slump.

Once thought of as an emerging market bond guru, Hasenstab’s reputation is starting to be questioned. In 2011 Hasenstab bought Irish bonds at knockdown prices, at one point even owning one-tenth of all Irish government bonds. Eventually this saw Hasenstab net a huge €5.6bn return for his employers Franklin Templeton and its clients.

Hasenstab did the same with Hungary owning 10% of the countries local bond market. It’s worth pointing out that a quick bit of research will show you how every media outlet questioned his sanity with both decisions but were quick to praise Hasenstab when bets paid off.



Argentinian crisis

The current argument however is fuelled by his latest big loss through Argentina. This saw Hasenstab and Franklin Templeton lose nearly $1.8bn in a single day during Argentine crisis involving the defeat of President Mauricio Macri in weekend primary elections which led to a sell-off of Argentinian government bonds.

This placed Hasenstab back in the firing line for negative media coverage even though over the past 3 years he has returned 15.4% versus a global bond peer group average of 7.6%.



Treasury bet

Owning treasuries in recent months has been an easy way to make money, therefore seeing Hasenstab shorting treasuries unlike most bond managers has ruffled anti-contrarian feathers.

Hasenstab is splitting opinion as he’s making bets that rates will rise, and bond prices will fall. He has been shorting treasuries by buying interest rate swaps – a contract that investors use to speculate on the level.

His position began small but has been growing steadily over the past 2 years gradually becoming the biggest bet against treasuries of any major global bond fund.

Hasenstab wrote his argument for this strategy in an email;
“Economic strength in the US will make today’s low-yielding bonds less attractive, especially if consumer prices start to rise. The short position hedges the risk that rising inflation, a high reliance on foreign investors to fund increasing budget deficits, and highly simulative monetary policy at a time of solid growth and record employment, could push longer term interest rates higher even while shorter term rates remain low and anchored.”

If right, the global economy is turning a corner. Central banks will be able to increase interest rates back to pre-crisis levels and bond yields will stop dipping ever lower.

If wrong, it may be that the global economy is too weak for central banks to stop trying to pump it up.

Right now, things do not look great for Hasenstab. The US Federal Reserve is back to cutting rates and Templeton Global Bond Fund has lost 4.8% in the past month.

Karim Anderson – Director of Manager Research at MorningStar inc says; “They have really dug into this position, and I don’t know that they’re going to walk away from it any time soon, because they don’t agree with the feds approach of being so concerned about external factors, rather than actual U.S growth.”

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