10 BARRON’S December 7, 2020
in yields, given that the two quantities
move inversely.
On the latter score, corporate bond
yields are hovering near or at historic
lows, which is arguably more important
to fixed-income investors than an uptick
in the benchmark 10-year Treasury note
yield back to the recent high of all of
0.95%.
The yield on the Bloomberg Barclays
U.S. Corporate Bond Index this past week
stood at 1.84%, just above the 52-week
(and all-time) low of 1.8%. For BBB-rated
corporate bonds at the low end of the
investment-grade scale, the yield was just
2.12%, a bit over the low of 2.09%. And in
what ought to be a violation of the truth
in labeling laws, the ICE BofA High Yield
Constrained Index stood at a record low
of 4.616%.
Those numbers prompted a call to Dan
Fuss, the ageless manager of theLoomis
Sayles Bondfund (ticker: LSBRX), to see
how he’s coping. “Not well,” he replied,
only a bit facetiously. In the old days, he
recalled, he could tell clients how good
things were after a rally, which he
quipped, basically amounted to “same
bonds, new prices.”
By contrast, Fuss and every other bond
manager has to confront the problem that
reinvestment returns have plummeted.
As a result, compounding of interest can’t
work its magic to grow assets to meet the
future needs of institutions such as pen-
sion funds and endowments. “Toss in an
extra prayer for life-insurance companies,
which have long-term obligations” to
policyholders, he says. It isn’t a unique
observation, but one that people have
been wrestling with even before this
year’s events.
Investors aren’t compensated for the risk
they assume, Fuss continues. Spreads—the
extra yield for riskier securities—are slim
in the corporate market. That’s true in
spreads between BB- and B-rated bonds
(the upper- and mid-tiers of the high-yield
market) or between BB+ and BBB- (the
dividing line between high-yield and
investment-grade bonds).
“I assert, currently, that you are not
getting paid for credit risk, and this is cer-
tainly a major consideration when you
look at your portfolios,” Mark Grant, chief
global strategist, fixed income, at B. Riley
Financial, similarly writes in his Out of
the Box note to clients. This bond-market
veteran puts the blame on the Fed
and other central banks for creating a
“borrower’s paradise” and a “fixed-income
investor’s hell,” by holding interest rates
down, in part to help finance the massive
fiscal deficits.
Part of the explanation for the lack of
compensation for credit risk is also the
proliferation of passive funds, notably
exchange-traded funds, Fuss continues.
As an active manager, he admits this is a
bit self-serving, but it results in the specific
risk of bonds being “underevaluated.”
There also is the pressure to put money to
work in the market, with over $335 billion
flooding into bond funds this year through
Nov. 24.
With yields so low, the risk is that
they’ll rise, which means that bond prices
risk falling. Based on a five-year forecast,
Fuss thinks it reasonable that interest
rates will be higher than currently. Corpo-
rations are acting on that expectation,
issuing bonds now in anticipation of pay-
ing off current issues as soon as they can
be called, he notes.
For investors, however, he doesn’t see
the payoff for taking those risks. “The
counterargument is, you’ll be good for
about two years, going out on the [yield]
curve and taking credit risk. Would you
get on a plane with those odds?” he asks
rhetorically.
Fuss admits that he gets unsolicited
input from shareholders in the $9.1 billion
Loomis Sayles Bond fund, notably about
maintaining the dividend, which yielded
2.68% as of Nov. 30. To that end, the fund
has a relatively expansive field of invest-
ments it can play in. The equity securities
limit is up to 20% from 10% previously,
while 35% can go to below-investment-
grade debt.
As noted here, the search for income
has led Fuss to stocks with dividends that
pay higher yields than the company’s
bonds. As an example, he notes that earlier
this yearPfizershares (PFE) yielded 4.2%
(compared with 3.79% currently), while he
recalls the pharma company’s debt yielded
“three and a fraction.”
Asked about another recently bumped
Dow Jones industrials member with an
outsize yield,Exxon Mobil(XOM), Fuss
wasn’t enticed. He noted the oil giant’s
latest asset write-down. “I won’t take you
through my climate-change speech,” he
added.
Nevertheless, Exxon topped a recent
screen of high-yielding stocks, even
though it was noted that a dividend cut
probably is priced into the stock.
That’s the problem with new highs. The
way forward often is lower.B
email: [email protected]
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