Fuss joins Gross in cutting long-term debt position before taper

Loomis bond manager is preparing for rising rates, focusing on 'improving credits'

Dec 11, 2013 @ 9:38 am

Dan Fuss is joining Bill Gross in shunning long-term debt before the Federal Reserve starts tapering its bond purchases.

Mr. Fuss, whose Loomis Sayles Bond Fund (LSBDX) is trouncing almost all of its peers, said he is “greatly reducing” long-maturity bonds. Mr. Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., recommends short-term debt.

“What we're doing to prepare for what we think is the rise in interest rates, without reducing, in the case of the mutual funds, the monthly dividend, is greatly reducing our position in long-maturity, very high-quality” debt, Mr. Fuss told reporters at a briefing Wednesday in Tokyo. “We're focusing as we always do on improving credits.”

The aversion to long-term bonds highlights the challenge the Fed faces — avoiding pushing up borrowing costs — as it prepares to scale back the debt-purchase program it used to help the economy through the recession in 2008-09. Treasury 10-year notes are headed for their worst annual performance in four years before the government sells $21 billion of them Wednesday in its last sale of the securities for 2013.

Shorter maturities “are less susceptible to higher interest rates” as the Fed, the biggest buyer of longer-dated Treasuries, is poised to taper, Mr. Gross said Dec. 6 on Bloomberg Radio.

The Loomis Sayles Bond Fund returned an average of 8.5% annually over the past three years, according to data compiled by Bloomberg. The gain beats 97% of its competitors, based on the figures. Mr. Fuss, Matt Eagan and Elaine Stokes run the $21.9 billion fund, according to the company website.

Pimco's Total Return Fund (PTTRX) gained 4.7% annually over three years, beating 75% of its peers, the data show. Pimco is a unit of insurer Allianz SE.

Ten-year notes have fallen 6.8% this year, the most since a 9.7% loss in 2009, according to Bank of America Merrill Lynch indexes.

Yields, benchmarks for company borrowing costs and mortgage rates, climbed more than 1 percentage point as traders prepared for the Fed to reduce its bonds purchases. Treasuries due in one to three years have returned 0.4% in 2013, based on the Bloomberg World Bond Indexes.

TAPER PROSPECTS

The Fed's next meeting is Dec. 17-18. Policy makers are considering reducing their debt purchases “in coming months” if the economy improves as it expects, minutes of the central bank's last session showed. The Fed buys $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs.

Chairman Ben S. Bernanke said last month the Fed will probably hold interest rates down long after ending the bond purchases.

The Federal Open Market Committee probably will begin reducing its bond buying this month, according to 34% of economists surveyed on Dec. 6 by Bloomberg, an increase from 17% in a Nov. 8 poll.

Mr. Fuss said he sees a 10% chance of the Fed tapering its bond purchases this month, whereas he previously put the odds at 70%. One reason is the storm that triggered National Weather Service advisories from Tennessee to Massachusetts Tuesday.

“Here we are in the key part of the Christmas season, and you get a weather event,” Mr. Fuss said. “If I were them, sitting inside their office in Washington watching cars out on the street skid into each other, I'd say: Wait a minute. Time out. Let's push this out.”

“The first stop would be March,” he said.

(Bloomberg News)

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