Advice from the Bond Market’s Buffett

Advice from the Bond Market’s Buffett

Often known as “the Warren Buffett of the bond market” Dan Fuss of Loomis Sayles shared much of his wisdom gleaned over 60-plus years in the industry in recent conversations with Barron’s. Though the 90-year-old Fuss no longer manages bond portfolios at Loomis, he calls himself “the grandfather of the office” and regularly dispenses advice to the managers at the Boston-based firm.

In the past, Fuss has focused his concerns for the bond market on Fed policy and economic forecasts, but recently that concern has turned toward global politics, climate change, and the increasing tribalism in the U.S. government. Indeed, Fuss believes the Fed’s recent decision to keep interest rates steady was partially influenced by the Israeli-Hamas war and its potential to impact the global economy. The Fed is likely done with their short-term rate hikes and could begin to slash them next year—an election year—with the first cut coming around June, similar to the federal-funds futures market’s predictions.

In addition to the conflict in the Middle East, Fuss has long been worried about U.S.-China relations and the possibility of a “Thucydides’ Trap,” where one country whose power is on the rise threatens to topple a dominant power. Russia’s war in Ukraine could also put pressure on the U.S. government’s budget, forcing the Fed to take a step back from its battle with inflation. That could potentially leave inflation in the 3% to 4% range, instead of the 2% that the Fed is targeting. While inflation probably won’t skyrocket like it did in the 1970s, interest rates will probably have cycles of higher highs and lows, reversing the past 40 years of falling bond yields coupled with low inflation, Fuss told Barron’s.

The standard 60% stock/40% bond portfolio would be especially impacted, with a rebalancing towards a 50/50 split. While Fuss shied away from advising on the equity side, he did suggest shifting away from long-term fixed-income assets. Meanwhile, on the bond side—Fuss’s domain of expertise—he recommends intermediate 7-to-10-year maturities in the corporate market, and pointed out issues that are trading at a bargain. While those bonds wouldn’t fall as much as long-term notes if yields go up, they could still rally and aren’t likely to be called early if yields go down. Opportunities also abound in certain high-yield bonds, though not in speculative-grade bonds, Fuss emphasized. Investors should take into account the credit rating of the issuer as well as the specifics of bond issues, such as coupon, maturity, call features, and security—something stock investors don’t have to consider.

Fuss has his gaze directed towards the future, and all of its possible risks, such as the geopolitical landscape and divisions in domestic politics. But it’s climate change that is top of mind for Fuss, and he believes institutions like pension funds that focus on the long-term should “protect cash flows over 10 to 20 years in ways that might benefit the climate,” reports Barron’s.