Renowned Bond Manager: "Bails on Bonds"

With increasing interest rates expected just around the corner, all of you bond holders may want to consider getting out of bonds and into stocks despite your gut feelings to stay away from stock-market volatility.

According to the infamous bond investor Dan Fuss, the threat that rising interest rates poses to bond investors will be a steady trend for the next two or three decades. 

Dan Fuss currently holds a prestigious position as the vice chairman of Loomis Sayles & Co. LP and he also manages the $21.2 billion Loomis Sayles Bond Fund (LSBRX). He's managed this account since 1991 and achieved annualized returns of 8.74% for 15 years. With so much invested in that fund, Mr. Fuss is keeping a very keen and cautious eye on what's going on with unemployment, the Federal Reserve, and the likelihood of higher interest rates in the near future.

Dan Fuss, image courtesy of Reuters.

If interest rates do begin a steady climb upwards, all existing bonds will lose value as the new bonds will be issued at the higher rates.

In the meantime, the important factor to pay attention to is the nation's unemployment rate. That will guide the Fed's decision making process regarding Treasury bonds and interest rates.

From Investment News:

If the unemployment rate falls to between 6% and 7%, it's likely that the Fed will stop buying up two-year Treasury notes and 30-year Treasury bonds, which has been keeping the interest rate on the 10-year Treasury bill artificially low, Mr. Fuss said.

“Once that happens, you need to get out of the market risk that's in fixed-income and into the company-specific risk you can find in stocks,” he said. 

Exactly one month ago today, Reuters reported on Mr. Fuss betting on pretty much anything except Treasuries. Kathleen Gaffney, vice president and fixed-income portfolio manager with Loomis Sayles agreed with Fuss:

"Treasuries have a lot of risk. There's interest rate risk if the economy gets strong legs," Gaffney says. "And if we inflate our way back to economic stabilization with continued quantitative easing ... returns on Treasuries going forward look pretty abysmal."

Despite these assertions, a majority of investors still seem satisfied with sticking with bonds. Volatile stock market activity has pushed most investors away from equities over the past year.

In fact, total assets in taxable-fixed-income funds have more than doubled since the onset of the financial meltdown beginning back in early 2008. They jumped from $1 trillion all the way up to $2.1 trillion in that time.

I think it's safe to say that Mr. Fuss is a bit of an expert when it comes to this matter. And if he is thinking about getting out of bonds and in to stocks, it may very well be a very wise decision to ponder before interest rates spike back up.