The “bond kings” have reigned only during the past four decades of bull markets, periods in which yields have steadily declined, meaning bond prices have been rising steadily over time, not every month.
But 88-year-old Dan Fuss remembers a time when the trend didn’t necessarily favor fixed-income investors. “I go back to ’58,” the vice chairman of Loomis Salles said in a phone conversation last week. And when he stepped away from day-to-day portfolio management last year, he was still mentoring and mentoring Loomis employees.
The furs arrived about one-third of the way through the post-World War II bear market, with long-term government yields rising by 2½%, where the Federal Reserve offered them 15% to help finance the war effort. was measured at the top. % as of September 1981. A steady-maturity, 2.5% 30-year bond would have lost 83% of its value during that period, according to Classic. history of interest rates, by Sidney Homer and Richard Silla.
But to make investment decisions now, he says, he won’t rely on history from the 1970s and 1980s, when inflation and interest rates hit well-recorded double digits. At the time, cutting out large interest coupons and reinvesting them at ever-increasing rates helped to offset the devastation of the bear market. Even during the miserable decade of the ’70s, $726 invested in B-rated corporate bonds would have grown to $1,153, according to Data from NYU Stern School of Business, (The series began in 1928 with $100 investments in various asset classes.)
now with meager yield With approximately 1.75% on 10-year treasuries and providing Triple-B Corporate only about one percent more, there is little interest income to cover the fall in prices. “There is no point in buying good corporate credit at the current return,” Fuss declared, arguing that strongly profitable companies with solid balance sheets are acting in the interest of equity investors, not their creditors.
For example, he continues, some major drugmakers have a history of raising dividends by 5% to 10% annually. Even assuming that their stocks don’t move over the long run, those rising payouts would mean that an equity investor would earn at least twice, and perhaps four times as much, as an owner of the company’s bonds.
Instead, Fuss will opt for a package of BB credits, which still have the highest tier called high yield and with the potential to be promoted to investment-grade. He cites the debt of Ford Motor (ticker: F) and its credit subsidiary as an example. While the auto maker’s bonds are kept below investment-grade, its shares have more than doubled in the past year, bolstered by both the potential of its electric F-150 Lightning pickup and its strong balance sheet. He further added that other speculative-grade credit has taken advantage of healthier market conditions to refinance high-cost debt and extend maturity.
But instead of being bought based on careful research and strict selectivity, most bonds these days are traded in blocks of 30 to 40 credits for an exchange-traded fund linked to an index. Or they may be acquired by active managers, who must focus on certain benchmarks not to stand a chance of falling far behind. Ideally, those managers would do better if they had stable assets and the flexibility to deviate from their benchmarks, not open-end funds for luxuries, such as the Loomis Salles Bond (LSBRX), which Fuss controlled until last year. .
The current, still historically low returns reflect the enormous liquidity provided by the Fed and other central banks. “It’s not comparable to any previous market I’ve even read about,” Fuss observed.
He compares the market in March to a frozen pond. When the snow becomes smooth and loose, it is in danger of melting, and it is time to return to solid ground. Elaborating on the metaphor, he is concerned about a catastrophic event comparable to the rupture of a large part of a glacier, which occurred in March 2020 during the pandemic-induced crisis in the markets.
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Markets already fear the ice will thin by the time the weather warms this year. They shuddered last week at the prospect of the Fed lifting rates and shrinking its balance sheet sooner than unanimously expected—even though the central bank is still pegging its key rate closer to zero and its bond holdings. continues to expand.
The 1950s and 1960s may be viewed by investors as nostalgic times for the markets, but Fuss says there were a lot of rocky patches in those days. Looking ahead, there are long-term risks of climate change, geopolitical disruptions and the loss of the dollar’s purchasing power. The rule of the bonded kings of the East is already looking like the good old days.
Write Randall W. Forsyth at [email protected]