As his 60-year tenure attests, Dan Fuss is one of the most respected bond investors. In my interview with Fuss last week, he explained why it would take either a geopolitical crisis or an economic collapse to drive rates lower. Fuss also said investors should exercise caution in bond ETF markets that are exposed to liquidity shocks.
“Anything that's levered and is a pool of things – an ETF that's levered – be cautious,” Fuss advised. “If it's levered more than 2:1, then leave it alone.”
“The standard early-style ETFs – the ones that don't wind up with more leverage – either through the buyers or the ETF itself – I don't worry all that much about,” Fuss said.
Fuss spoke at a CFA Society Washington, DC lunch on April 18. He talked about the global economic implications of monetary policy, and I spoke with him afterwards about his forecast for interest rates and the risks in bond ETFs.
Fuss is vice chairman of Boston-based Loomis Sayles and manages the firm's flagship Loomis Sayles Bond Fund (LSBDX).
I’ll review Fuss’ comments on how rate hikes will influence the markets and why investors should avoid certain bond ETFs. But first, let’s look at his assessment of how the global economy is impacting the fixed-income universe.
The five Ps
As is his standard practice, Fuss reviewed the global landscape through his “four Ps”: peace, people, politics and prosperity – and a fifth dimension he introduced a few years ago – the role of central bankers.
In Fuss’ forecast in October 2017, which I covered in this article, the topic of peace – or lack thereof – was displaced as his usual focus, and replaced with an in-depth analysis of politics.
But this time, despite the tumultuous state of peace and politics in the world today, Fuss did not focus his analyses on either topic.
Fuss’ latest forecast featured the role of central bankers – including an assessment of how monetary policy will impact geopolitics and global markets.
While most of his outlook focused on the Fed, Fuss did say peace as is the dominant factor to consider.
“Peace – or lack thereof – is the dominate factor anytime, anywhere, for anybody,” according to Fuss. “And if that’s really going badly, then the rest of us aren’t worried about markets or P/E ratios or yield.”
“Now luckily, that’s not a bad topic right now,” Fuss said, “but it’s not as good as it was a few years ago; it was a more peaceful time then.”
Fuss spent little time discussing global conflicts, but rather urged investors to remember that peace “right now is the dominate factor because things can change.”
Fuss spent only a brief moment on politics. “This used to be a 22-second part of my speech, and I’m going to limit myself on this,” Fuss said.
“You have to acknowledge that the political setting, in a number of advanced parts of the world, is highly uncertain,” Fuss said. “Our own is a good example, and Europe is a very good example.”
He noted that the cohesion within the European Union does seem to have weakened, “so it makes it very difficult to deal with the problems we are analyzing in other parts of the world.”
“My political advisors said ‘you must keep your mouth shut,’” Fuss said jokingly, and moved on to the remaining topics.
“People – this is not the major threat to peace,” he said plainly, “the people part of it now is the movement and aging within society.”
Fuss explained that we are seeing historically unprecedented rates of population movement around the world, “It creates opportunity in very few places, but primarily, it creates friction,” he said. “Friction in a machine causes wear and tear,” he warned, “and it’s same thing on the investment side.”
Read the full article here by Marianne Brunet, Advisor Perspectives