Dan Fuss: Bond investors have learned from experience…not
In some ways, famed bond investor Dan Fuss is pleased by how far the bond market has come during the last year. October and November 2008 made for a “horrific experience” he said. Since then, bonds have made an incredible recovery. However, their rebound has also brought back some of the behavior that fed their problems, said Fuss to the Fixed Income Management 2009 conference of the CFA Institute on October 1. Fuss is vice chairman of Loomis, Sayles & Company and co-manager of a number of institutional separate accounts for the firm’s fixed income group.
Fixed income’s bleak months in 2008, when it was difficult to get bids for even the highest quality investments left an impact on Fuss. On paper, October and November offered a fantastic buying opportunity. He spoke of a “50-year opportunity in bonds” in November 2008. Unfortunately, instead bond funds struggled last autumn to sell in response to mutual fund redemptions.
As a result, now Fuss pays more attention to liquidity of his investments, even if it means that “I’m fighting the last war.” Compared to 18 months ago, “I’ll give up something to buy something more liquid,” he said.
Until a few months ago, Fuss thought he wouldn’t see a repetition of the risky behavior that he illustrated with his fable of Colossal Corporation, the world’s largest maker of “colossals,” a product Fuss made up for the purpose of his story. Colossal Corp. began by dabbling in hedging the price of ore and the Australian dollar, and then went heavily into the carry trade. Eventually, it got burned by the credit crunch and decided to give up its speculative ways.
For awhile Fuss thought that the Colossal Corporations of the world had learned the lesson that they should stick to their business rather than speculating in financial markets. “I thought that was all history,” he said. However, over the last three to four months, he observed that “By God, this thing is starting to replay…. The people who skate on thin ice when they shouldn’t are starting to skate on thin ice again.”
Speculation is reviving because of the steep yield curve, said Fuss. There is an enormous incentive to go out the yield curve to pick up yield. He discussed a risky new product that made its debut in Japan in March 2009. The Japanese product is being copied by others. “I can’t believe this is happening,” said Fuss.
Recently, traders at Loomis Sayles told Fuss that he should act quickly if he’d like to get in on a B- credit that would pay a special dividend. “I thought it was a joke,” said Fuss. But it was not.