This is a bit of market commentary that’s absolutely staggering in terms of its honesty and the selflessness of the speaker. If you’ve not heard of Dan Fuss, he’s the legendary mutual fund manager who runs the Loomis Sayles Bond Fund, an institutional favorite for Dan’s ability to go anywhere in search of fixed income market alpha.
Dan’s been trading bonds since the Civil War (or for more than 50 years, but who’s counting) and he regularly makes it to the top of all the lists for excellence and stewardship etc.
Anyway, here’s Dan on the coming bond bear market (via Investment News):
“We’re in the foothills of a gradual rise in interest rates,” said Mr. Fuss, vice chairman of Loomis Sayles & Co. LP and manager of the $21.2 billion Loomis Sayles Bond Fund (LSBRX). “Once they start to rise, you’re probably looking at a 20- or 30-year secular trend of rising interest rates.”
When interest rates go up, the value of existing bonds drops as new bonds are issued at the higher rates.
The unemployment rate is going to be the main factor in when the Federal Reserve Bank starts to raise interest rates in earnest, Mr. Fuss said.
If the unemployment rate falls to between 6% and 7%, it’s likely that the Fed will stop buying up two-year Treasury notes and 30-year Treasury bonds, which has been keeping the interest rate on the 10-year Treasury bill artificially low, Mr. Fuss said.
“Once that happens, you need to get out of the market risk that’s in fixed-income and into the company-specific risk you can find in stocks,” he said.
Now of course, the bull case for equities is that this rise in rates happens gradually and under the control of the Fed and for the right reasons (such as the employment one laid out above).
You’ll not here this kind of anti-bond, pro-equity thesis from a great many fixed income managers, for obvious reasons. But when you’ve been around as long as Fuss, it’s no longer about the AUM, it becomes more about the challenge and the work itself being good work. Thanks, Dan.