The luminaries of high finance have staked more than $100 billion in one of the boldest bond bets of the post-crisis era: That a global economy firing on all cylinders would spur government yields in the West and boost emerging-market credits.
The wager comes in the form of bond funds that have a negative average duration, meaning they are heavily positioned for rising interest rates. But the trades are struggling. A perfect storm — including muted core inflation increases and relentless haven flows — has kept a lid on longer-dated developed-market yields. Trade tensions and a stronger dollar have killed the emerging-market rally, bucking consensus on Wall Street.
That's all left portfolio managers like Jack McIntyre with a big question: what will it take for the strategy to come good?
"Trade tensions have hurt our European growth thesis," argued McIntyre, who oversees $58 billion of fixed-income assets at Brandywine Global Investment Management. "We need clarity on how trade is going to unfold for our short European duration positions to outperform again."
It's not just about the tensions in global commerce, however. A combination of the protectionist threat, European political risks, muted price increases and policy maker success — the Fed has so far navigated a smooth exit from stimulus and increased rates without spooking the market — have all helped ensure that term premiums remain contained.
Hasenstab
That's bad news for the more than $100 billion of bond funds which have a negative average duration, according to data compiled Morningstar Inc. As of the end of the first quarter, about 80 percent of that money is in funds managed by Franklin Templeton Investments, the data show.
Franklin Templeton's bond chief, Michael Hasenstab, has been waiting since at least 2016 for his wager — that U.S. rates would return to a pre-crisis normal of sorts thanks to an economic upswing and diminishing monetary stimulus — to come good. He extended the bet earlier this year, primarily using interest rate swaps to push average duration down to a record low of -0.85 years as of the end of March.
In a May interview with Bloomberg TV, Hasenstab predicted rising inflationary pressures, an onslaught of U.S. bond supply and the Federal Reserve's moves to pare its balance sheet would conspire to drive up the U.S. 10-year yield to as high as 4 percent.
The yield rebounded from an earlier retreat on Wednesday after the Trump administration released the biggest list yet of Chinese goods it may hit with tariff increases. It was trading little changed at about 2.86 percent.
A representative of the fund declined to comment further.
Iain Lindsay, the firm's co-head of fixed-income portfolio management, said competing pressures from robust U.S. growth on one hand and trade tensions on the other underscore the need for a "dynamic approach" to duration management.
