The financial markets may have let out a collective sigh of relief on January 1 when U.S. politicians managed to avoid falling off the fiscal cliff, but the fact is the fundamental issue plaguing the U.S. still hasn’t been addressed – mounting debt.
-Michael Hasenstab, portfolio manager, Franklin Templeton
The financial markets may have let out a collective sigh of relief on January 1 when U.S. politicians managed to avoid falling off the fiscal cliff, but the fact is the fundamental issue plaguing the U.S. still hasn’t been addressed – mounting debt. As a result, Dr. Michael Hasenstab, co-director of the International Bond Department, says he simply doesn’t see much value in U.S. Treasuries right now. He does see it elsewhere in the world, though, including Ireland and select emerging markets where fiscal houses appear in much better order.
Kicking the Can
Hasenstab predicted politicians would likely “kick the can down the road” rather than deliver a comprehensive deficit reduction plan when the calendar turned to a new year, and that’s what essentially happened. U.S. politicians still haven’t addressed the fundamental financing issues the nation faces. Here’s Hasenstab’s take on the situation—and what it means for U.S. Treasuries.
“Our central scenario is that U.S. economic growth will be around 2%, which is not great but it’s certainly not a collapse. That will provide some bedrock of global stability. In terms of U.S. Treasuries, we would need to see much higher yields combined with a lot better fiscal policy for us to find value in them. Right now U.S. Treasuries in our view are being artificially suppressed in terms of yield and artificially inflated in terms of price because our government—through the Federal Reserve Bank—is buying a lot of those assets, and there was a panic about Europe that forced a lot of buyers into this market.
We think both those sources of buyers should eventually dissipate. The Fed can’t buy forever. And, things in Europe—while troubling in terms of entering a protracted period of slow growth—don’t look near the type of critical condition that we saw a year or two years ago. So that buyer base seems like it will increasingly be absent; that makes U.S. Treasuries vulnerable, in our view.”
That said, Hasenstab believes one of the biggest risks globally right now is on the political policy side, but it doesn’t seem to be a near-term crisis scenario.