Brocker.Org: A star Wall Street fund manager is getting it all wrong

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Michael
Hasenstab


Bloomberg
screenshot



The US Treasury market has been on a roller coaster ride the over
the past six months.

After President Donald Trump’s election win, investors rushed out
of the market and yields on longer-dated bonds surged. Rising
yields are an indicator of — among other things — expected growth
and inflation in the economy. As traders speculated that Trump’s
plan to slash taxes and roll back regulations would bring both
back, the 10-year yield crossed above 2.6%, a high not seen since
the third quarter of 2014.

But, things haven’t exactly gone according to plan for the Trump
administration. Trump’s attempt to repeal and replace the
Affordable Care Act, also known as Obamacare, stalled in the
House of Representatives, and that caused analysts up and down
Wall Street to question his ability to push through other pieces
of his agenda like tax cuts and an infrastructure package.

And so, those yields have reversed direction.

Some investors, though, aren’t ready to give up the argument that
the Trump trade will resume soon enough — that yields will rise
again, and now’s a good time to bet on that.

Franklin Templeton star bond-fund manager Michael
Hasenstab says its just a matter of time before this
happens. Appearing on “Bloomberg
Daybreak: Americas
” on Tuesday, Hasenstab told Alix
Steel, Jonathan Ferro and David Westin that Treasurys are
probably “one of the biggest financial bubbles out there.”

“If you look at economic growth, you look at inflation, you look
at foreign buyers that are starting to walk away, these numbers
just don’t make sense and it’s kind of like walking on a lake in
April and it’s still frozen but eventually its going to crack so
we still like a short position on US Treasurys,” Hasenstab said.
(Yields move inversely to prices, so shorting US Treasury’s
is the way to bet they’ll rise). 

The thing is, there’s far more evidence that everything Hasenstab
said isn’t happening. Let’s break down that statement for a
moment.

‘look at economic growth’

First quarter GDP, which was released on Friday, came in at a
paltry 0.7% annualized rate. That’s the
slowest growth in three years
. And
while Hasenstab’s comments were made a few days before
the report was released, economists were expecting growth of just
1%.


gdp growth q1 2017Business Insider/Andy Kiersz, data from
FRED

‘look at inflation’

It is true that inflation has perked up a bit, but its still
nothing to write home about. According to Societe Generale’s
Omair Sharif its unlikely to remain elevated:

“After spending nearly five years missing to the downside on
the inflation target, the Fed finally achieved its goal as the
yoy headline PCE deflator hit 2.1% in February. Unfortunately,
Fed officials cannot take a victory lap, because they will be
right back to missing the target again when the March figures
are released. The data in hand from the PPI and CPI suggest
that the headline PCE deflator likely fell by 0.164% in March,
which would result in the yoy rate falling from 2.1% to 1.9%
(1.885% un-rounded).”


pce price indexBusiness Insider/Andy Kiersz, data from
FRED

‘look at foreign buyers that are starting to walk away’

Finally, foreign buyers have been dumping Treasurys lately,
but a good portion of that was a result of China and Saudi Arabia
defending their currencies. As the two countries have gotten
their outflows under control, the selling of Treasurys has
slowed.


china fx vs ustBusiness
Insider/Andy Kiersz, data from Bloomberg

Komal Sri Kumar, president of Sri-Kumar Global
Strategies and a senior fellow at the Milken Institute told
Business Insider that “markets are taking a ‘show me’
approach to Trump tax reforms, and not ready to discount the
development yet.”

He doesn’t see the US reaching 3% GDP growth until
late-2018 at the earliest, and he says that means the 10-year
yield is “going below 2%.”

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