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By Miriam Sjoblom, CFA | 01-05-2011 05:00 PM

Hasenstab: Global Plays for a Rising Rate Environment

The 2010 Fixed Income Manager of the Year says his team sees opportunity in the currencies and short-dated bonds of less-levered, higher-growth countries outside of the U.S.

Miriam Sjoblom: A lot of the work you did in the portfolio in 2010, it didn't necessarily pay off in 2010--it is preparing for what comes next. Can you talk a bit about what you've been doing in the portfolio and your outlook for 2011?

Michael Hasenstab: To your first question, one of the big strategies that we focus on is a long-term thesis. So, we did position in 2010 for some issues that we think will take a couple of years to evolve. One is our concern that U.S. interest rates will go higher, so we have become very defensive, and were in 2010, on U.S. interest rates.

We're also positioning for a lot of opportunities in some of the less-levered higher-growth countries outside of the U.S.; many of those are in emerging markets. We think that the combination of good economic fundamentals and a lot of liquidity in the G3 that will flow to those economies will eventually appreciate their currencies. Right now we think they are undervalued; over the next couple of years, we would see them revaluing.

The other opportunity in those markets is, as they raise rates we can buy short-dated bonds, protect ourselves against interest rate risk and position for the currency to appreciate at a higher yield.

So, as those bonds mature, we just roll them over as those countries raise interest rates. So, a lot of, I think, exciting opportunities in emerging markets, in particular, in Asia.

Sjoblom: The overall duration of the portfolio being brought lower in recent years, do you expect in 2011 for currency to be a bigger driver of returns?

Hasenstab: I think over the next couple of years, interest rate opportunities are fairly limited. So, it really is trying to earn yield without taking interest rate or too much credit risk. So, that's why in South Korea, for example, we like buying short-dated bonds: You can earn 3.5% in a currency that we think is undervalued without having to take interest rate risk and in a solid investment-grade-rated country. Australia the same way: You can get close to 4% yield without taking interest rate risk in a currency we like.

So, I think yield plus currency opportunities will be a bigger component of returns as opposed to positioning for interest rates to go lower, because frankly, I think, globally rates are going to be going higher.

Sjoblom: What would you say are the biggest risks to your thesis these days?

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