Fed hike, inflation risk underestimated: Templeton's Hasenstab

[June 14, 2016]  By Trevor Hunnicutt

CHICAGO (Reuters) - U.S. Treasuries are not as safe as investors assume, fund manager Michael Hasenstab said on Monday, as full employment and rising inflation put pressure on central bankers to raise rates.

The U.S. Federal Reserve could tighten monetary policy as inflation rises to 3 percent this year and oil prices stabilize, according to Hasenstab, chief investment officer of Templeton Global Macro, who spoke at the Morningstar Inc Investment Conference in Chicago.

Such a move would be a catalyst for a rise in the U.S. dollar and declines in the euro and yen currencies, already under pressure from domestic policies and potential British exit from the European Union.

"I don't think the market is priced for this," he said of the risks.

Hasenstab, a top portfolio manager of several Franklin Templeton Investments bond funds known for placing big bets in places like Ireland and Ukraine, has already seen his portfolios hurt in recent months while betting against the Japanese yen.

Despite efforts by the Bank of Japan to make exports more attractive, the safe-haven yen has gained 12 percent this year.

The lowest-cost shares of Templeton Global Bond Fund have returned negative 5.5 percent over the last year, through June 10. The fund's results over that period lag most peers ranked by Thomson Reuters Lipper, a data service.

Hasenstab showed no sign of backing down as he offered a view of how his contrarian investments could prosper over the next five years.

"We would not refer to it as gambling," Hasenstab tartly responded to a question on the currency bets, citing his two-decade-long record as an investor. "In order to protect capital we do have to take risk so we go out there and we look for what are the mispriced assets."

He said the yen rose as the Japanese central bank's policy of keeping rates low failed to weaken the currency in the face of U.S. stimulus measures. The yen cannot continue to rise as the Bank of Japan policymakers "debase" the value of their currency and as the Fed raises rates, he added. Rising rates would also shrink U.S. government bond values.

Hasenstab said he saw opportunity in Brazil, where he made a significant bet late last year, despite its "worst economic crisis" since the 1980s. But "we can see an exit," he said, because the country's debt levels were "quite manageable."

Franklin Resources Inc, Hasenstab's corporate overseer, managed $737 billion on May 31.

(Reporting by Trevor Hunnicutt; Editing by David Gregorio and Richard Chang)

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