COPENHAGEN (Reuters) – Markets and policymakers could be making a mistake in assuming inflation will stay low for ever, bond investor Michael Hasenstab said on Tuesday, adding that a very challenging market environment may lie ahead.

Hasenstab, who oversees several bond investment strategies at Franklin Templeton, made his name with contrarian bets on unloved markets including Ireland and Ukraine that then yielded huge payouts.

He said as recently as March that U.S. Treasury yields were set to go higher, and that the Federal Reserve raising interest rates further could not be ruled out. Even then that was a contrarian view as markets had started anticipating a shift in the Fed’s policy stance.

So far though, 10-year U.S. yields have slipped, their fall accelerating recently as the Fed signaled readiness to cut rates as early as July due to slowing growth and inflation.

While the Fed has struggled for a decade to meet its inflation target and forward inflation swaps are signaling sub-2% inflation for years ahead, U.S. unemployment levels are near five-decade lows.

Speaking in Copenhagen, Hasenstab said wage inflation was ticking higher and was likely to do so further.

“The cyclical and structural factors on inflation from the labor market are real and we shouldn’t ignore them,” he told a conference.

“We should at least question the possibility that maybe this low inflation environment won’t last forever.”

Hasenstab made no specific reference to his current investment strategy.

But he said portfolio managers needed to “think of a world that might be different” because of risks stemming from deficits, unconventional policies, populism and the lack of policy tools to tackle the next recession – especially if policymakers doubled down on the non-standard measures they have adopted so far.

“Believing that central banks can solve every world problem when they’ve already fired most of their bullets is something we should question,” he said.

“…What we have opted to do is build a portfolio we think can actually hedge some of those risks,” he said, without elaborating. “The probability of those problems happening is growing.”

Hasenstab’s Global Bond Fund, one of the best performing in its category over a ten-year period, had returned 2.5% this year as of May.

However, assets under management are around $34 billion versus almost $70 billion four years ago, possibly due to the unpopularity of emerging market debt in recent years.

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