The sharp rally in corporate debt markets triggered by a round of central bank stimulus is spoiling the veteran bond investor Dan Fuss, who warns that investors are taking the highest risk he has seen in six decades.
Central banks last year sharply cut interest rates and expanded bond purchase program to cushion the economic impact of the pandemic, on an even limited scale the measures taken to combat the financial crisis.
Stimulation helped create a the market is back, lifted stocks to record highs and helped pin government bond yields near historic lows. But investors scrambling for more profitable but undervalued, riskier debt are now becoming startlingly aggressive. money manager like Fuss, vice president of the $353 billion investment firm Loomis Sayles.
Fuss said in an interview with the FT: “I was terrified to see what was given up in terms of natural prudence and prudence. “We will have to wait and see how things play out, but the possibility of a profit has overcome the fear factor.”
His starting fuss career in finance in 1958, when he left the United States Navy to work at a Wisconsin bank. After a later stint as Yale University asset manager, he joined Loomis Sayles in 1976 and managed one of its top bond funds until he finally stepped back from the job of managing the portfolio. daily investment at the beginning of this year, at the age of 87.
During that time, Fuss has won numerous awards, including being inducted into the Fixed Income Analysts’ Association Hall of Fame in 2000 and winning the Investment Portfolio Manager Award. Morningstar’s Annual Excellence Award in 2019.
However, the excesses of the current environment are the greatest of his career, even surpassing the pre-financial crisis, in the words of one bond market veteran. “I’m optimistic, but you have to keep your intelligence on you. The bond market isn’t as safe and secure as it used to be,” Fuss said. “There are risks everywhere.”
Fuss’ comments were echoed by Goldman Sachs chief executive David Solomon earlier this week, with the former junk bond banker also warning that the market is prone to failure.
“When I step back and think about my 40-year career, there have been times where greed outweighs fear – we are in one of those phases.” Solomon told Bloomberg at a conference in Singapore. “My experience says those times don’t last long. Something that would rebalance it and bring in a little more perspective.”
Fuss is skeptical that the Federal Reserve will be able to raise interest rates significantly in the coming years – despite the possibility of a 1950s-style “flash” of inflation – so Loomis Sayles chief executive officer said he was mainly worried about high yield bond market, also known as junk bonds.
The average yield on high-yield US bonds spiked to a peak above 11% in March 2020, but fell to a record low of less than 4% earlier this fall. Despite recent bond market volatility due to rising inflation concerns, junk bonds still offer an average yield of 4.4%.
While that’s attractive compared to the 2.3% offered by safer investment-rated US corporate bonds – and the lower yield of 1.6% on 10-year Treasuries. year – but still almost half the level seen at the height of the 2007 credit boom. The yield on the CCC-rated highest-risk corporate debt, the lowest possible tier without actual default, has fallen from a 2020 high of around 20% to 7.8%.
“Portfolio managers looking at this market aren’t stupid, they’re aware of the risk. But if you run a high-yield fund and retreat to Treasuries you’re going to underperform,” Fuss pointed out.
Email: robin.wigglesworth@ft.com
Twitter: @robinwigg
