It was a safe bet that any session at this week's Morningstar Inc. conference labeled as a "global bond perspective” was going to include a heavy emphasis on Europe, and the presenters did not disappoint.
"I think Europe muddles along and the best case is a Greek exit [from the euro], and hopefully they can build a fire wall around that to protect the rest of Europe," said Penny Foley, portfolio manager with The TCW Group Inc.
Ms. Foley was joined on the panel by Dan Fuss, fund manager at Loomis Sayles & Co. LP, and Steve Walsh, chief investment officer at Western Asset Management Co.
"In the emerging markets, there is a growth story and better debt metrics, a much better fiscal outlook and higher yields — which is a pretty interesting trend," Ms. Foley said. "But in the short term, I think emerging-markets debt will suffer from people looking to take risk off the table. We look at the impact of Europe on the emerging markets, and it's pretty pervasive and really does require concern."
Mr. Walsh said he believes the best way to evaluate Europe right now is through the prism of investor reactions, because the situation in the 17-country eurozone is too complicated to try to handicap.
"From an investment perspective, you can't know how good or bad things are, but you can figure out what the market is discounting," he said. "Right now, the markets are priced for a lot of bad outcomes, and that's where we have been taking our cues from. We are leaning against that pessimism."
On the domestic front, Mr. Fuss said that "we are in the foothills of a long rise in interest rates."
However, when asked for an indication as to when those foothills might become mountains, Mr. Fuss said it will depend on the outcome in Europe and a reduction in Treasury-bond buying by the Federal Reserve.
"I don't know exactly when we'll go from the foothills to the mountains, but I don't want to read about it after the fact," he said. "I don't want to structure portfolios to say we'll deal with that when it comes."