Michael Herbst: To circle back to the corporate bond space, obviously both investment-grade and high-yield rallied quite strongly in March and April.
Kathleen Gaffney: I'll say. It has been phenomenal.
Herbst: And again, a few weeks ago, you and I discussed the idea that perhaps the worst is still yet to come in the high yield space. Could you explain a little bit about how you've taken advantage of the recent rally in investment grade and high yield to say position the portfolios at Loomis Sayles for the next coming year?
Gaffney: Sure. It really has been amazing how quickly spreads have come in, but also when you think about it with the high-yield market, the wides we were at, we were about 2,000 basis points over Treasuries, we've come in to about 1,000 basis points over 1,200 to 1,000. And that's where the wides were in 2002.
So in some sense there is definitely some value there. I think the challenge is that in '09, while we expect economic headwinds and we do see the green shoots that everybody is seeing, we just expect it to be a very modest recovery, which means it's going to be really tough to get spreads to tighten much more from here, which is fine just to earn that coupon. And we don't see going back out to the wides, but I think the market is getting a bit ahead of itself. And when we do start seeing the reality of this very gradual recovery, I think that is going to pose some problems for the market.
So what we have been doing is looking at our credits, both investment grade and high yield, and just saying, "Are these credits that are good value right now?" If they are levered credits and they have had a big run, it might be a good time with all this momentum to take a little bit of that risk off the table.