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By Sarah Bush | 02-25-2014 11:00 AM

Stokes: Investing in a 'Tricky' Bond Market

With low yields and stretched valuations, today's bond market is a lot more about bond picking and building specific risk into the portfolio, says Loomis Sayles' Elaine Stokes.

Sarah Bush: Hello, my name is Sarah Bush. I'm an analyst with Morningstar, and today I'm joined by Elaine Stokes from Loomis Sayles.

Elaine, thanks very much for being with us today.

Elaine Stokes: Thanks for having me.

Bush: I thought we could talk a little bit about the bond markets. There was a lot going on last year, and again we have seen some rallies in the Treasuries. Lots of news out there. Could you talk about you and your firm's outlook for the bond markets?

Stokes: Yes. I would say that the current outlook is constructive, but I will call it a little bit tricky. We definitely are at a time when yields are still pretty low, and valuations feel a little bit stretched, as we have been in a rally for quite some time now. So it really is a market where it's a lot more about bond picking, about building specific risk into the portfolio. Buying credits that we believe can have real upside potential that we can see--rating movement.

It's one where we feel very good about the U.S. We feel like the U.S. economy has a pretty solid base right now and has the potential to do well without the fiscal drag of last year. We are really, I would say, being a little bit more U.S.-centric in the portfolios because of that, and we see more of the minefields being outside of the U.S. And we also like where we are in the corporate credit cycle. We are still in the expansionary phase. Not quite getting into that late expansion. So we are still in the expansionary phase, and that should be good for credit ratings and a decent environment for corporate credit.

Bush: With all that said, could you talk a little bit about some specific areas where you found particular opportunities or where valuations are still attractive?

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