Dan Fuss, the vice-chairman of Loomis Sayles & Co., has more than 50 years of experience in the bond markets. In that time, the Milwaukee native, 76, has amassed an impressive record. Last year, he and his team won the Morningstar award for best fixed-income manager. He sat down in New York last week with The Globe's Joanna Slater.
Where do you see opportunities in today's bond markets? Depending on who you talk to, there's not much out there.
Right. In the traditional areas that move with the market, which most bonds do, you say, "ehhhh." U.S. Treasury bonds are priced higher than a kite. So you say, sell Treasuries, buy corporates - done that. Now what do you do? Well you can't go watch the Red Sox in the World Series because they're not in it, unfortunately.
Then what?
Within the broad category, you can make a fairly decent case for specific items. In other words, it's a specific risk, not a market risk. When you do that in the corporate area, short term, things look really good. Longer term you have to do your homework because that will change as you go forward. As a matter of fact, it's likely to get a little bit dicey for many. You have to look at what a firm's incoming cost of capital will be in an environment where the U.S. Treasury is taking more and more of the savings flows. That's a rugged environment for [companies]who are not the most efficient in a growing area. If you're not in a growing area, your answer is clear.
Where else?
You look around and say, where don't we have this dynamic, where do things look better, and how are the securities priced? And what does the currency look like? There you can come up with some things.
Do you like Canada as an investment destination?
Yes. One-sixth of the bond fund is in Canadian government securities. That level is about where it's been but the structure has changed. Really all of that is in 18-month, two-year type Canadian government funds. It used to be all in long provincial. We rode the upgrade. We also like [bonds denominated in the]New Zealand dollar and the Australian dollar. Southeast Asia, you have to be a little more careful. We like it, the dynamics are wonderful, probably better on the stock side, but good on the bond side. Everybody and his brother knows it. Some of the prices have gotten outlandishly out of whack. That's always dangerous. If you have a bubble anywhere, that's it.
What do you worry about?
The world is awash in liquidity. The only part of it that doesn't live up to it happens to be the major U.S. banks-slash-underwriters and some of the European ones. You say, "Okay, what do they know that we don't know?" It's what they don't know that scares them. They're uncertain of their environment under regulation to a degree. They're uncertain about all the built-in leverage in the markets. They have a first-hand look at that, and it's scaring the bejeebers out of them.
What about high-yield bonds?
People argue with me on this one, but I would bring down the risk tolerance because of the, quite frankly, crazy situation that has developed with [high-yield bond]ETFs. That's never been tested. You cannot improve your liquidity through derivatives very effectively, in fact, hardly at all. So that means money swings into and out of the biggest issuers, who, in general, tend to be the worst credits.
(This interview has been condensed and edited.)