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Dan Fuss – The New Factor In The Bond Markets

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Dan Fuss – The New Factor in the Bond Markets

March 3, 2015

by Robert Huebscher

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Dan Fuss’ career in the bond market has spanned over 50 years. During that time, Fuss has spoken regularly at CFA luncheons. Last week in Boston, he began by warning that what he had to say would be markedly different from any of his previous talks.

Fuss is vice chairman of Boston-based Loomis Sayles and manages the firm’s flagship Loomis Sayles Bond Fund (LSBDX).

Fuss analyzes the economy and the bond market along four dimensions – the “Ps” of peace, people, politics and prosperity. Those considerations, however, no longer suffice to explain the market’s underlying dynamics.

A fifth dimension now dominates his thinking: the expanded role of the world’s central banks over the last two years.

I last heard Fuss speak in October 2013, when he predicted that rates would rise – causing his fund to miss the full benefit of last year’s bond rally. In April 2012 he made a similar, but incorrect, prediction.

Let’s look at Fuss’ current forecast for rates, his assessment of his four Ps and how the role of central banks has changed his thinking.

Peace or lack thereof

Peace – or lack thereof – is far and away the most important force shaping future outcomes, Fuss said, with an impact that extends beyond the markets. The U.S. Treasury’s borrowing requirements are dictated by the federal deficit, over which defense spending exerts an outsized influence.

Defense spending as a percentage of GDP has been coming down gradually over the last few years, Fuss said, and will be approximately 3.3% for the current fiscal year. The most recent budget proposal notched it up a bit, he said. Fuss attributed the decline to a decrease in the size of our armed forces and equipment to support them.

“Defense spending has not placed pressure on the budget,” he said, “despite the fact that a deficit is forecast.”

But how realistic is the proposed defense budget? According to Fuss, things changed about a year and a half ago due to the developments in the South China Sea, which were followed by events in Middle East and then by the uprising in Eastern Europe. “This could require an expanded call on the military,” Fuss said.

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