Dan Fuss, the “Four Ps” and the Bond Market

Dan Fuss, vice-chairman of Loomis Sayles and manager of the Loomis Sales Bond Fund, has been in the fixed-income markets more than half a century. Over the last ten years, his fund has outperformed 92% of its peers, although it’s near the bottom for this year. Fuss says, “In the fixed-income markets, we have to deal with low rates and low inflation,” continuing, “both will rise. That is not a good combination.” More broadly, he analyzes the bond market according to what he call “four Ps” – peace, people, prosperity, and politics – as well as the role of central bankers.

Peace, or its absence, dominates Fuss’ projections. He is currently worried about developments in the Middle East and Eastern Europe, but especially the South China Seas. Nonetheless, he expressed optimism that issues with China will be resolved.

Fuss’ greatest prosperity concern relates to defense spending, which he expects to rise (perhaps as much as 1-3% of GDP). “Unless something really changes,” he says, a gradual acceleration of U.S. defense spending “will happen.” And that, according to Fuss, will likely lead to increased taxation of investment income.

Regarding “people,” Fuss notes reduced growth and coming declines in developed country populations. In the U.S., he suggests demographics will favor bonds over stocks.

Fuss sees significant political issues negatively affecting the forecast. “Pressures are growing in the way our democracy works,” he says, noting congressional difficulties on issues such as the debt-ceiling and suggesting that the emergence of a third party is a real possibility. He also says that “the nature of [Chinese] government is changing” through a consolidation of power in few hands, and “history is not kind when it comes to centralization of power.”

Regarding central banks, Fuss points to changes regarding quantitative easing and, especially, the extension of banks’ focus to international matters. He pointed to the Bank of Japan’s establishment of 10 currency swap lines, the Fed notes indicating consideration of international issues, and other factors.

His forecast for the bond market is less than rosy. He suggests that geopolitical trends will have a negative impact on the bond market. He sees some bargains in energy, depending on oil prices, likes bank loans “a whole lot more” than several months ago, and suggested emerging market corporate debt can be a reasonable investment if it is in local currency rather than dollars. Overall, he expressed concern that low liquidity has become a “big problem” that was “unanticipated.” Noting unacceptable bond prices, he states, “Wall Street can no longer carry a huge amount of inventory,” reasoning, “the regulators are at fault.”