Dan Fuss has 50 years of experience in the investment management industry and has been with Loomis, Sayles & Company since 1976. He is vice chairman of the firm and manages numerous institutional accounts for its fixed income group. Dan also manages a variety of mutual funds, including the flagship Loomis Sayles Bond Fund. In 2000, he was named to the Fixed Income Analysts Society’s Hall of Fame in recognition of his lifetime of contributions to advancing the analysis of fixed income securities and portfolios.
Dan Richards interviewed Dan Fuss at the CFA Institute Annual Conference in Boston on May 24. A video of this interview is available here.
Dan, you are participating in a panel on the questions that trouble bond managers. What is the number one question that keeps bond managers awake at night?
To be straightforward, I sleep very well no matter what.
All right, so what keeps other bond managers awake at night?
If I was prone to stay awake at night, the one thing that would keep me awake would be market liquidity.
The fundamental difference between the stock market and the bond market is that the stock market, by and large, tends to be an auction market. There is a regular meeting spot, and there are predetermined people, at least on the exchanges, who maintain a semblance of order called the market. And the other non-exchange markets feed off that, so you have a rough idea of what the going price is as the day goes along.
That does not exist in the bond market. You come close with Treasury debt, but as you get away from that you can have difficulty with price discovery. Last Thursday night, for example, the pricing tape on single-A paper had price discrepancies, by our calculations, of five to six price points. However, that was extreme.
When you think back to 2008, for corporate issues there was virtually no bid at various points in time.
That's right. There was no bid on some AAA paper that would normally trade $50 million in an instant.
So the first issue you worry about is liquidity. What would be next on your list, if you were prone to worry?
If I was prone to worry, I would be concerned with credit.
Today, the corporate sector in North America doesn't seem to be a major worry – quite the reverse. Credit trends right now, in my estimation, are as good short-term as I've ever seen them. And I've been doing this for 52 years now.
The public sector is another matter.
Credit trends at the margin are widening, and the most obvious example would be Greece, but the same is true for other large issuers like the United States government.
And certainly in our state and local area there are exceptions where you are not nearly as worried, and things look rather good looking forward. One of them happens to be where you live. The Canadian government budget balance looking forward under reasonable expectations looks a whole lot better than the US. Either that, or you Canadians are fooling us.
