optimusprime_IHB
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This article should be free....it's a good read from Barron's
"My wild guess here is that the next peak in 10-year Treasury yields will be about 6.25%. That's a good 4? or 5 years ahead of us." --Dan Fuss
<a href="http://online.barrons.com/article_print/SB124727713988926549.html#mod=BOL_hps_mag">http://online.barrons.com/article_print/SB124727713988926549.html#mod=BOL_hps_mag</a>
BARRON'S MFQ
Economic Recovery Prognosis: Four More Years
Interview with Dan Fuss, Manager, Loomis Sayles Bond Fund
By KAREN HUBE
When will the economy be made whole again?
FIFTY YEARS IN THE BOND BUSINESS WAS as good training as any fixed-income manager could hope to bring to last fall's credit crisis. But Dan Fuss, the 75-year-old manager of Loomis Sayles Bond Fund (ticker: LSBRX), concedes he learned two new lessons as the markets went into an unprecedented collapse.
First: "I learned that liquidity can leave big markets much more quickly and severely than I've ever seen before, and so the need to hold a primary reserve -- essentially in Treasuries and cash -- is greater," he says.
Second: "Humility." Mr. Fuss swallowed humble pie last year as his $15.5 billion bond fund fell 22%. But his 10-year average annual return more accurately reflects Fuss's reputation as an excellent money manager. The fund, which invests primarily in investment-grade securities but can take on any kind of bond, has returned an annual 7.02% over the past 10 years, beating 90% of its peers. And so far this year, the fund is up 17%, ahead of 84% of its category.
He recently chatted with Barron's:
Barron's: Are we facing a major inflation problem?
Fuss: We have the probability of major inflation in several years unless we can really bring the federal deficit under control and get back to at least a 2.5% or maybe 3% of GNP difference between revenues and expenditures. We're a long way away from this -- in the teens right now -- but prior to the past year we were in that 2%-to-3% range. I think we'll get back down close to that, but it will be hard to hold because there will be a lot of pressure for spending.
What about when it comes to monetary policy?
It's clear inflationary pressures are rising. Look at the expansion in the reserves of the banking system and you might say, 'Oh my gosh, we're soaking a drying field here with gasoline; as soon as a match comes along we're going to have a blaze.' Theoretically that's true. But practically speaking that's not true in the near term because you have enormous unused capacity.
Will the Federal Reserve be able to avert a massive inflationary era with its monetary policy?
I don't think we'll face anything like the 1970s and early 1980s, because I do think with a lag the central banks will get involved, but not until the economies get a lot stronger. I'm using plural because the U.S. is just one of the central banks faced with the same situation.
What is your view of the economy?
Technically speaking the economy is bottoming right now, but the recovery will be long and drawn out. Nobody is building new plants, new office buildings or shopping centers, which means that job growth won't come back for quite a while. There is a build-up on inventory starting again, but while that appears to be an improvement, it's just to match up with a low level of demand. It's still not a healthy economy.
By when do you expect a full economic recovery?
Until we get back to the November 2007 level, the start of the decline, it will be about four years in total. You would think it would be more like six years, but here's my thinking: Developing nations -- and China in particular -- are going to get well-above-average growth in per-capita demand for consumer goods. That's going to spur capital spending there, and they are going to need equipment to expand capacity, and our exports and Europe's will pick up. That ought to lift us right out of it in about four years.
What's in store for the capital markets and interest rates?
Because of this enormous pressure for new money from the Treasury over the next few years, and because of longerterm pressures of how to pay for medical costs for older folks, you're not going to have a stable situation for the capital markets until the government revenue is up to a good 10% of GNP, which means a 50% increase.
The pressures will be toward rising interest rates for the next few years, and for as long as 20 years. The 10-year Treasury yield right now is 3.44%. My wild guess here is that the next peak in 10-year Treasury yields will be about 6.25%. That's a good 4? or five years ahead of us.
How would you rate the Obama administration's response to the credit crisis?
I give them high marks. But I gave the last administration high marks as this broke into the open. I am not happy with every single move by any means. But the capital markets that were illiquid last fall are liquid now. There is liquidity back in the credit markets.
Would you say bond liquidity levels will soon return to normal?
Not to the liquidity they had two years ago. There's not an across-the-maturity-spectrum, across-the-quality-spectrum type of bid in the market. Dealers are not willing to bid for the bonds themselves, but on behalf of someone else, to serve as a pass-through. They're keeping inventory levels very low. That's not a deep market.
You would figure that with short-term rates low, inventory levels would be high.
Theoretically, yes. But the basic characteristics of the dealer function in corporate bonds has changed. It used to be you could hedge your inventory in the credit-default market, but that market has been badly damaged. It's hard for dealers to protect their inventory, so they don't want to take on the risk.
What are your thoughts on President Obama's proposed plan to overhaul the nation's financial regulatory system?
That has me worried. If, as I'm sure it will, it limits the capacity of the banks, you have to carry that right through and say you're talking about reducing future growth. On other hand, if you don't do anything, we'll be set up for a redo of last fall. So where's the middle ground? I have a hunch that it's going to limit future growth more than you would hope for.
"My wild guess here is that the next peak in 10-year Treasury yields will be about 6.25%. That's a good 4? or 5 years ahead of us." --Dan Fuss
<a href="http://online.barrons.com/article_print/SB124727713988926549.html#mod=BOL_hps_mag">http://online.barrons.com/article_print/SB124727713988926549.html#mod=BOL_hps_mag</a>
BARRON'S MFQ
Economic Recovery Prognosis: Four More Years
Interview with Dan Fuss, Manager, Loomis Sayles Bond Fund
By KAREN HUBE
When will the economy be made whole again?
FIFTY YEARS IN THE BOND BUSINESS WAS as good training as any fixed-income manager could hope to bring to last fall's credit crisis. But Dan Fuss, the 75-year-old manager of Loomis Sayles Bond Fund (ticker: LSBRX), concedes he learned two new lessons as the markets went into an unprecedented collapse.
First: "I learned that liquidity can leave big markets much more quickly and severely than I've ever seen before, and so the need to hold a primary reserve -- essentially in Treasuries and cash -- is greater," he says.
Second: "Humility." Mr. Fuss swallowed humble pie last year as his $15.5 billion bond fund fell 22%. But his 10-year average annual return more accurately reflects Fuss's reputation as an excellent money manager. The fund, which invests primarily in investment-grade securities but can take on any kind of bond, has returned an annual 7.02% over the past 10 years, beating 90% of its peers. And so far this year, the fund is up 17%, ahead of 84% of its category.
He recently chatted with Barron's:
Barron's: Are we facing a major inflation problem?
Fuss: We have the probability of major inflation in several years unless we can really bring the federal deficit under control and get back to at least a 2.5% or maybe 3% of GNP difference between revenues and expenditures. We're a long way away from this -- in the teens right now -- but prior to the past year we were in that 2%-to-3% range. I think we'll get back down close to that, but it will be hard to hold because there will be a lot of pressure for spending.
What about when it comes to monetary policy?
It's clear inflationary pressures are rising. Look at the expansion in the reserves of the banking system and you might say, 'Oh my gosh, we're soaking a drying field here with gasoline; as soon as a match comes along we're going to have a blaze.' Theoretically that's true. But practically speaking that's not true in the near term because you have enormous unused capacity.
Will the Federal Reserve be able to avert a massive inflationary era with its monetary policy?
I don't think we'll face anything like the 1970s and early 1980s, because I do think with a lag the central banks will get involved, but not until the economies get a lot stronger. I'm using plural because the U.S. is just one of the central banks faced with the same situation.
What is your view of the economy?
Technically speaking the economy is bottoming right now, but the recovery will be long and drawn out. Nobody is building new plants, new office buildings or shopping centers, which means that job growth won't come back for quite a while. There is a build-up on inventory starting again, but while that appears to be an improvement, it's just to match up with a low level of demand. It's still not a healthy economy.
By when do you expect a full economic recovery?
Until we get back to the November 2007 level, the start of the decline, it will be about four years in total. You would think it would be more like six years, but here's my thinking: Developing nations -- and China in particular -- are going to get well-above-average growth in per-capita demand for consumer goods. That's going to spur capital spending there, and they are going to need equipment to expand capacity, and our exports and Europe's will pick up. That ought to lift us right out of it in about four years.
What's in store for the capital markets and interest rates?
Because of this enormous pressure for new money from the Treasury over the next few years, and because of longerterm pressures of how to pay for medical costs for older folks, you're not going to have a stable situation for the capital markets until the government revenue is up to a good 10% of GNP, which means a 50% increase.
The pressures will be toward rising interest rates for the next few years, and for as long as 20 years. The 10-year Treasury yield right now is 3.44%. My wild guess here is that the next peak in 10-year Treasury yields will be about 6.25%. That's a good 4? or five years ahead of us.
How would you rate the Obama administration's response to the credit crisis?
I give them high marks. But I gave the last administration high marks as this broke into the open. I am not happy with every single move by any means. But the capital markets that were illiquid last fall are liquid now. There is liquidity back in the credit markets.
Would you say bond liquidity levels will soon return to normal?
Not to the liquidity they had two years ago. There's not an across-the-maturity-spectrum, across-the-quality-spectrum type of bid in the market. Dealers are not willing to bid for the bonds themselves, but on behalf of someone else, to serve as a pass-through. They're keeping inventory levels very low. That's not a deep market.
You would figure that with short-term rates low, inventory levels would be high.
Theoretically, yes. But the basic characteristics of the dealer function in corporate bonds has changed. It used to be you could hedge your inventory in the credit-default market, but that market has been badly damaged. It's hard for dealers to protect their inventory, so they don't want to take on the risk.
What are your thoughts on President Obama's proposed plan to overhaul the nation's financial regulatory system?
That has me worried. If, as I'm sure it will, it limits the capacity of the banks, you have to carry that right through and say you're talking about reducing future growth. On other hand, if you don't do anything, we'll be set up for a redo of last fall. So where's the middle ground? I have a hunch that it's going to limit future growth more than you would hope for.