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Dodge & Cox: Why Treasuries Look Risky

Dan Culloton

Dan Culloton: Hello, I'm Dan Culloton, an associate director of fund analysis at Morningstar. I'm here today with Dana Emery, one of the managers of Dodge and Cox Income, an Analyst Pick in the intermediate term bond category for us.

Dana, thank you very much for being here today.

Dana Emery: Thank you for having me.

Culloton: We're coming off a very tumultuous year in the fixed-income and equity markets, a year when a lot of investors thought the only place to invest were Treasuries. Yet looking at your fund, it seems that you think Treasuries are not really the best place for investors to be right now. Could you just talk a little bit about that?

Emery: Sure. It's always been a hallmark of our firm to use fundamental research to find securities that we believe are attractive over the longer term. With that, we are constantly looking across the corporate, mortgage, asset-backed, and also the government markets for investment opportunities.

In this tumultuous environment, it created a real opportunity in our opinion to build up a larger position in corporate credits because of the reward that was offered in terms of yield premium. So during this period we were increasing our credit exposure in the Dodge & Cox Income Fund by about 10 percentage points from June over June.

Culloton: This implicitly says that you think that Treasuries are perhaps over-valued and perhaps a more risky place to be right now?

Emery: We think that Treasuries are not risky from a credit standpoint, but they are risky from a returns standpoint.

They have had tremendous returns in this cycle, as there is a flight to quality and investors drove up the prices of Treasury securities and drove down their yields to very low levels. We are starting with very low yields, and that doesn't provide a good ongoing income stream to protect you against the risk of rising rates in the future. So we have the Treasury weighting in the Income Fund at a fairly low level.