The prevalence of global liquidity will lead the Federal Reserve to hold off on raising rates beyond when markets expect, Franklin Templeton’s Chris Molumphy has said.
The Citywire AA-rated manager and CIO for Franklin Templeton’s Fixed Income Group made the comments in a market update.
Discussing future policy direction, Molumphy, who co-runs four bond funds, said the rates rise question dominated discussions in 2014 and look set to be as prominent this year.
‘It’s the old question, right? Where are rates going? Is this going to be the year where they go up, I think, is the question we have had over the last few years,’ he said.
‘I take you back to this time last year, at the beginning of 2014, US treasuries, intermediate treasuries, started the year at about 3%, market consensus was they were definitely going up in 2014. We ended the year a touch under 2.2%.’
Molumphy said consensus is once again pointing to a rise in intermediate US government rates but the outcome is the opposite. ‘Here we are, just a couple of weeks into the year and we’re lower yet again,’ he said.
‘So, where are we going in 2015? What I would tell you is that as long-term fundamental investors, our view is that the equilibrium rate for intermediate US treasuries is higher, should be higher, and likely will eventually move higher.’
This belief – powered by improving economic growth and tightening labour markets – Molumphy said is a longer-term view, while the short- to medium-term outlook is decidedly different.
‘There remain some significant factors influencing domestic interest rates. Number one: inflation. With oil prices, headline inflation will be moving down quite likely over at least the next couple of quarters, so we see inflation over the near term likely moving lower.
‘Secondly, when we look at global yields, it paints a different picture. In the US, we tend to think about things on a domestic basis and really focus just domestically, but the markets are global. When we look at government yields outside the US, that paints the US treasury yields in a little bit different light.’
Molumphy said these factors, coupled with abundant global liquidity through Japanese and European quantitative easing, means, for the first half of the year at least, the status quo can be maintained.
‘When you put all that together, even though we think the equilibrium level of intermediate rates in the US is higher and rates will eventually move higher, over the short to intermediate term, we could continue to see intermediate rates low, lower than they should be otherwise, for a little bit longer than perhaps the market suspects,’ he said.
The $1.7 billion Franklin Strategic Income fund, which Molumphy co-runs with Kent Burns and Eric Takaha, returned 15.8% in US dollar terms over the three years to the end of December 2014. This is while its benchmark, the Citi WGBI TR USD, fell 2.88%.