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Scaring the Swiss

Dan Fuss, vice chairman and portfolio manager, Loomis, Sayles & Co., answered our 10 Questions.

Dan Fuss, 12/13/2010

Agree or disagree: The economy is on the mend.
Partially agree.

Are bonds' best days behind them?
Yes.

Biggest current threat to bond investors--rising interest rates or credit defaults?
Neither. Eventually, it's rising interest rates, and it doesn't necessarily threaten. It depends how you deal with it. Defaults are always a big problem.

They are just not here in the present. As you go forward into even this current cycle, it's going to be more of a problem in the low-grade area because the new financing is done with lousy indentures to protect the issuer. Good for the issuer, bad for the investor. It happens every cycle, and it's happening again.

How concerned are you about inflation?
Very, with a lag. The driver underneath inflation is, actually, rising rates. It's not the other way around. The rising rates become a component of the rise in inflation.

What sectors are offering the most values?
There are a few, but they scare the bejesus out of people. I said one on national TV yesterday. I never should have. But by now, everyone will have commented on it. The periphery of Europe and government debt--not corporate, corporate is too pricy. Ireland. You want to upset people as far away as Zurich, say that on national TV. You get e-mails right away, and it was nighttime over there.

What about opportunities in the United States?
There is no outstandingly cheap area. Investment-grade is certainly cheap relative to Treasuries. So is everything else, because Treasuries are overpriced. But when you adjust for that and look at the average dollar price on a corporate bond, say, roughly 1-10, it's not a good thing.

Are you concerned about the amount of new money flowing into your funds?
Well, no, because not a lot is. But I am watching the amount of money going into ETFs. ETFs have a lot of good aspects to them, but it's a very dangerous style to invest if you get into a narrow mandate. In investment-grade corporates or in common stocks, it's all right. In high-yield, in emerging-market local pay, the emerging-market anything pay, those are narrow areas; you cannot have a good liquidity proxy worked in there. So when the outflows come, talk to any sponsor, what do you do? Well, you tell the investment bank to sell them. To who? Those are cash bonds.

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