Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. INVESTING
April 19, 2018 01:00 AM

Loomis Sayles' star bond manager talks about rising rates, trade wars

Trade wars could lead to stagflation, Dan Fuss warns

John Waggoner
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Bloomberg
    Dan Fuss, vice chairman at Loomis Sayles & Co.

    Dan Fuss has 59 years of experience, 42 of them with Loomis, Sayles & Co. LP. He has run the Loomis Sayles Bond Fund since 1991, averaging an 8.99% annual gain. Over the past 15 years, the fund has outpaced the Bloomberg Barclays U.S. Aggregate Bond Total Return index by 3.94 percentage points a year — a record that few of his competitors could match. John Waggoner, a senior columnist with InvestmentNews, Pensions & Investments' sister publication, spoke with Mr. Fuss about bonds and the new risks facing investors.

    John Waggoner: How many rate hikes do you think we will have this year?

    Dan Fuss: We're heading to the 2% mark in inflation, and possibly going through it. So another two, another three hikes this year. (Boston Federal Reserve Bank President) Eric Rosengren actually said another three.

    JW: Are companies increasing wages?

    DF: I see something a little different. Compensation has more variability. A lot of the investment management firms and some service firms keep the wage increases small or they don't increase at all once you get to a certain level — but they do pay bonuses. But on the benefits side, health insurance charges being paid by the company are being shared more with employees. I don't know of any exceptions to that.

    JW: Why are companies so reluctant to spend?

    DF: I've heard industrial companies — most notably, Caterpillar and Deere — make a point of saying that things couldn't be better. However, in their planning, they now have contingencies: If the trade barriers start, their expansion stops. They are not going to expand in the face of a possible trade barrier. It's not in the statistics because, in general, the industry analysts are coming back with pretty optimistic things. We know raw material prices so far for industrial production have not gotten out of hand. Once you start to see the uncertainty, you say, 'I'm going to wait and see what happens.' Sanctions and tariffs can damage the economy.

    In addition, they can do brutal damage to international relationships. Frayed relationships — cutting diplomatic staff — that's serious stuff. Once you're starting to mess with the quality of peoples' lives, you have to ask, 'What are the side effects?' The Chinese message of doing live-fire drills in the Taiwan straits, that's a pretty clear message. You don't have to wonder what that means. If we're putting on tariffs and hurting them, they can also respond by putting tariffs on us, some of which will hurt.

    JW: So tariffs could hurt economic growth?

    DF: Based on data and observations, you can say things do look good in the economy. I hope we'll be able to continue; but a number of people say, 'We'll have to see what happens with trade.' I'd be broader than that and say, I'd be concerned with trade and geopolitical developments that are broader than trade, but heavily influenced by trade. When I'm thinking about our investment policy, I start with the geopolitics. I don't get to the economy until step four, and I don't get to the Fed until step six, because they're doing the same thing. They are looking at the geopolitical situation, and also looking at the movement of people in the Mideast and South America, and how those things affect the cost of money in those areas.

    When you look at domestic politics and politics around the world, you have some problems in predictability, which is the nicest way you can put it. Same thing in Europe. You don't want the central banks locking horns with each other. Then I ask, what is going to surprise us? The Fed, in my opinion, is trapped by circumstance. They have a domestic mandate that's spelled out. The mandate doesn't cover what's happening in Asia or Europe, and yet the impact of what they do in those areas is severe. I agree with the sanctions because of the chemical warfare in Syria. But if you start putting sanctions that hurt people who aren't involved in the war, you get political unrest.

    JW: At what level will the Fed stop raising rates?

    DF: In a perfect world of economic growth with 2% inflation, they would still overshoot a little bit and end up with fed funds at 3.25%, maybe 3.5%, then settle back toward 3%. If that's the case, once you settle in at 3%, that puts the 10-year Treasury note just a smidge over 4% and the long bond at 4.5%.

    The Fed doesn't want to ruin a good thing. As soon as they see something implode on tariffs or trade barriers, it will scare them. They have a structural blind spot there because that's international government policy. If I were them and see tariffs come in, I'd increase estimates on inflation and decrease it on the economy. The old name for that is stagflation. It's going to be a slowing economy with rising inflation — the worst of all worlds.

    I want to keep the geopolitics just a bit removed, but it's the overwhelming variable. It's not a good thing. There is some good news there: To the degree North and South Korea want to declare the war over, that would be a good thing. We could get that artillery out of the hills over Seoul and not threaten to blow each other up — that would be a good thing. I can't see harmony increasing very much in Europe, but I could be wrong on that. But I don't see the unification of Europe stretching to having a single government. And if I were Vladimir Putin, I'd be more worried about what's east of him than what's west of him.

    And China's an entirely different thing. We have a large group of people, finally unified autocratically, and very likely to run into the Western European dominance as personified by the United States. And that could lead to the Thucydides trap — Athens vs. Sparta. (The Thucydides trap states that when one great power threatens to displace another, war is almost always the result.) How this gets resolved is even more critical than some of the examples from earlier in history, because the nature of the weaponry we have is awful. As bad as the one big world war in the first half of the last century was, at least we couldn't blow up the whole world. Now we can. So you have work these things away.

    You might say, 'This is a long way away from figuring out whether the Fed will raise rates two times or three times.' But we think of the yield curve and economic growth measured in quarters, but what we have is a mishmash — kind of like some of the models of the neurons firing back and forth. In general, rates are going up, unless the Fed has to blow the whistle and say 'Stop' because something has happened. Right now, they have no reason to stop. However, looking out further, you have a situation developing that could cause lower economic growth and higher inflation. In that case, are they going fight inflation or promote growth?

    JW: Where would you put bond money now?

    DF: The Loomis Sayles Bond Fund is 35% in reserves, and the average maturity of the fund has been cut more than half from where it has been for years and years. It's down to 5.5 years now. What are reserves? Some is in the bank, about 20% is in T-bills and another 15% is in a little bit longer-dated Treasuries and related things. We don't include anything with calls in there. By the way, the reserves are not idle — they may be the best-performing area. The fund's yield is in the mid-3% range. It's not a high-yield return, but it's pretty good. We're more cautious on the credit side than we were, both in the loan area and in high yield.

    Next year, economic growth could be 2.8%. Could it be way below that? Yes. Could it be higher? Not by a lot. The big issue is not what the Fed is up to. The big influence is geopolitics and how that affects the economy, inflation and what the Fed does.

    Related Articles
    Fed unanimously raises rates by 25 basis points, cites strengthening economy
    Dalio sees probabilities of trade war rising
    IMF warns trade wars could hurt global economic growth
    Yield curve flattens amid rising bond yields
    Commentary: Credit investing – bias beware as the cycle turns
    Recommended for You
    China stocks
    Global investors take cautious approach to Chinese stocks following the country's reopening
    Calculator
    25% of institutional asset owners considering OCIO in next 24 months – Cerulli
    watchglass stock chart 1550-main_i.jpg
    U.S. insurers likely to increase risk tolerance, private assets – Conning
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Outlook 2023: Opportunity in a volatile world
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing