Bond investors steering clear of Treasuries

Professional fixed-income investors continue to shun U.S. Treasury bonds. Dan Fuss, manager of the $19.4 billion Loomis Sayles Bond Fund, currently has just 2.51% of his portfolio in U.S. Treasuries, and his allocations to government debt aren't likely to change anytime soon. “We're in the foothills of a long, possibly 20-year rise in interest rates,” Mr. Fuss told reporters at Loomis Sayles & Co. LP's annual media luncheon. Like his biggest competitor, Bill Gross of Pacific Investment Management Co. LLC, Mr. Fuss has been reducing his holdings of U.S. Treasuries for more than a year. He said the combination of modest growth going forward and continuing high government deficits will keep rates headed higher for a long period. “With 3% real GDP growth this year, the government will still have a deficit of about 4% [of GDP]. The Treasury has to borrow that money and will crowd people out of the market like the late 1960s and '70s,” Mr. Fuss said. Interest rates will rise when the second round of quantitative easing ends, he added. Mr. Fuss's portfolio is currently weighted toward higher credit risks, with almost 24% of the fund in high-yield credits as of Dec. 31. Just slightly less than that is in investment-grade bonds, and another 11% in convertible debt. He has about 30% of the fund invested outside the U.S., with commodities-rich Canada accounting for a 13% weighting of non-domestic debt. The fund earned a remarkable 12.95% last year, more than 600 basis points better than the benchmark Barclays Capital US Government/Credit Bond Index. Over the past 10 years, Mr. Fuss has earned investors 9.31%, compared with 5.83% for the benchmark.