Opportunities in the bond market are as attractive now as they have been in at least 50 years, according to Dan Fuss, vice chairman of Loomis, Sayles & Company. He spoke on “The Bond Market Outlook” to the Boston Security Analysts Society on November 24. Fuss co-manages numerous institutional accounts, the Loomis Sayles Bond Fund, and the Loomis Sayles Strategic Income Fund.

Treasuries overvalued, investment-grade and high-yield attractive

Investors around the world are still rushing into U.S. Treasuries, but Fuss has already hit the exit. He sold his remaining Treasuries on Nov. 20. “They were vastly overpriced,” he said. Investors’ appetite for Treasuries is “very understandable for liquidity,” but does not make sense based on current valuations. The long-term outlook for government bonds isn’t good because governments — not just the U.S., but also countries like Japan and Germany — will be big issuers of new bonds.

But Fuss sees opportunities in investment-grade corporate bonds. Even if defaults and losses rise as high as in the Great Depression, Fuss said, these bonds “are very cheap.” In addition, he said, convexity is “wonderful,” and reinvestment risk is low.  Convexity measures the extent to which upside and downside responses to interest rates are different — a highly convex bond will act like a long duration bond when rates fall (a good thing) and like a short duration bond when rates rise (also a good thing) — hence convexity is a very desirable property in a bond. 

“I’ve never seen an opportunity — relative or absolute — as good as this to buy in the investment-grade market,” he said.

Fuss also likes high-yield bonds. They also seem cheap, even if defaults and losses hit Great Depression levels, although such historical analyses must rely on proxies since high-yield bonds didn’t exist back then. However, unlike investment-grade corporate bonds, high-yield bonds have been this cheap before, as recently as six years ago. Still, he said, if you know what you’re doing, investing in high-yield bonds could pay off with “a small fortune” — as long as “you’re willing to take 30% bloody disasters and 70% survivors.”

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