Interest rates are going up this year, and that has Dan Fuss, vice chairman of Loomis Sayles & Co. LP, very hopeful about future bond returns.
What caused interest rates to rise so suddenly last month
Mr. Fuss: I get asked a lot when interest rates are going to go up. For heaven's sake, they've been going up since July. The Fed is managing the yield curve. They've been doing so for quite some time. They had managed it down to 1.6% or 1.8% 11 or 12 months ago. As the economic news started getting better, they've been stepping it up. In the last week of May, it got a little sloppy, and they lost control and yields spiked up. That was too much. … (now) they've reinstated law and order. They're punishing anyone who's been short long Treasuries.
Do you expect the Federal Reserve to lose control of rates again
Mr. Fuss: I think it'll be more controlled. The New York Fed's role is to be the cop. They're trying to maintain control. When they more formally say they're backing off, you'll see a steeper yield curve. The one day I would guess that could get bumpy is the Friday after the 4th of July. Trading that day is going to be thinner than Christmas Eve, and it's not a holiday overseas. If the markets do get bumpy, though, the Fed will get in there.
Are you worried about what rising rates could do to bondholders
Mr. Fuss: Spikes up in yield, actually — depending on how you're managing this — is about the best thing that can happen from a long-term viewpoint. What you really want is for interest rates to be higher as you reinvest coupons, principal and any new money. It's a difficult concept for people to grasp, because for 31 years and about eight and a half months, interest rates have gone down. That's the environment people recollect.
I started my career on June 1, 1958. For my first 23 years and about four months, interest rates always went up. We started off with yields of 3% to 3.5%, and by the end of 1981, yields were 15%. Corporate yields were around 20%, and everything was selling at a discount. Nothing could be better. In the 1960s and 1970s, I didn't have to get up until about 6 a.m. because there was no need to rush to get in the office. Now I get up around 4:15 a.m.
I am hoping for gradually higher interest rates.
Are you able to find value in bonds
Mr. Fuss: The bond market itself is overvalued from a longer-term viewpoint. Short-term, most bonds were overvalued two weeks ago. There's been some disorder in the high-yield market and in the emerging-markets debt that has shaken both those markets very much.
Where do you see rates going this year
Mr. Fuss: I don't think we're staring at 3% at the end of the year. Maybe 2.6% to 2.8%. That actually may be a little too hopeful on rates. Nominal rates will progressively go higher. There will be a seesaw up. If all you're doing is reinvesting, it's a wonderful thing.
"Fuss: Rising rates can be positive for investors" originally appeared on InvestmentNews' website, a sister publication of Pensions & Investments.