Low yields have left investors numb to risk, says bond veteran Dan Fuss

Strong recovery in corporate debt markets sparked by a flood of central bank stimulus measures frightens veteran bond investor Dan Fuss, who warns investors are taking the most risk he has seen in the past six decades.

Last year, central banks drastically cut interest rates and launched massive bond buying programs to mitigate the economic impact of the pandemic, on a scale that has even eclipsed measures taken to combat it. the financial crisis.

The stimulus helped produce a remarkable return to the market, taking stocks to record highs and helping to keep government bond yields near all-time lows. But the investor rush for higher-yielding but lower-rated and riskier debt is now so fierce it pisses fund managers like Fuss, the vice president of $ 353 billion investment house Loomis. Sayles.

“It scares me when I see what is being abandoned in terms of natural prudence and prudence,” Fuss said in an interview with FT. “We’ll have to wait and see how things go, but the scope of the performance has outgrown the fear factor.”

Fuss began his career in finance in 1958, when he left the US Navy for a job at the Bank of Wisconsin. After a subsequent stint in endowment management at Yale University, he joined Loomis Sayles in 1976 and managed one of his flagship bond funds until he eventually retired from portfolio management. day to day earlier this year, at the age of 87.

During this time, Fuss won numerous awards, including being named to the Fixed Income Analyst Society Hall of Fame in 2000 and winning Morningstar’s annual Outstanding Portfolio Manager Award in 2019.

Yet the excesses of the current environment were the greatest of his career, surpassing even those of the pre-financial crisis era, according to the bond market veteran. “I’m optimistic, but you have to keep your cool. The bond market is not as safe and secure as it used to be, ”said Fuss. “There are risks everywhere.

Fuss’s comments were echoed by Goldman Sachs chief executive David Solomon earlier this week, with the former junk bond banker also warning that markets were vulnerable to a setback.

“When I step back and think back to my 40-year career, there have been times when greed has far surpassed fear – we’re in one of those times,” Solomon told Bloomberg at ‘a conference in Singapore. “In my experience, these periods don’t last long. Something will rebalance it and bring a little more perspective.

Fuss was skeptical of the Federal Reserve’s ability to raise interest rates significantly in the coming years – despite the likelihood of 1950s-style “spikes” in inflation – so the CEO Loomis Sayles said he was primarily concerned about the high yield bond market. , often also called junk bonds.

The average yield on U.S. high yield bonds peaked over 11% in March 2020, but fell to a record low of less than 4% earlier this fall. Despite a recent wave of volatility in the bond market triggered by growing fears of inflation, junk bonds still offer an average yield of 4.4%.

While this is attractive compared to the 2.3% offered by safer, investment-grade U.S. corporate bonds – and the stingy 1.6% yield on 10-year Treasuries – it remains almost half of levels seen at the peak of 2007 credit boom. The yield on the riskiest CCC-rated corporate debt, the lowest possible rung without actually defaulting, fell from a 2020 high of around 20% to 7.8%.

“The portfolio managers who watch this market are not stupid, they are aware of the risks. But if you run a high yield fund and fall back on Treasuries, you’re going to underperform, ”Fuss pointed out.

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Twitter: @robinwigg

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