Bloomberg News

Loomis Sayles’ Gaffney Shuns Treasuries, Targets High-Yield Debt

October 04, 2011

Oct. 4 (Bloomberg) -- Kathleen Gaffney, co-manager of the $18.9 billion Loomis Sayles Bond Fund, said she’s shunning Treasuries and sees “great value” in corporate bonds, especially high-yield debt as relative yields soar to the most in more than two years.

“We don’t own any U.S. Treasuries right now because in the short-run you’re not earning anything in terms of yield, and in the long-run we eventually see rising rates, which means negative returns,” she said today in an interview on Bloomberg Television’s “InBusiness with Margaret Brennan.” “In the U.S., there is definitely great value in corporate bonds, both investment-grade but primarily high-yield.”

Speculative-grade bonds declined 6.3 percent in the third quarter, the worst period since the three months ended December 2008, pummeled by a worsening sovereign-debt crisis in Europe and the threat of another recession in the U.S. Europe’s financial leaders are trying to repair Greece’s recession-struck economy while insulating Italy and Spain and shoring up banks that the International Monetary Fund says face as much as 300 billion euros ($397.8 billion) in credit risks.

The extra yield investors demand to own high-yield debt instead of Treasuries has soared 3.14 percentage points to 8.72 percentage points since the end of July, the most since September 2009, Bank of America Merrill Lynch index data show. The debt is ranked below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s.

‘Doing Your Homework’

Yields of 7.5 percent to 8 percent on B rated debt and as much as 10 percent on lower rated corporate bonds offer “a significant amount of carry if you’re doing your homework and you’re comfortable with the company,” Gaffney said. “The challenge is in this low-growth environment, some of those lower-quality corporates, triple C rated bonds for example, probably carry a significant amount of risk, so you have to be careful about your issue selection.”

Yields on 10-year U.S. Treasuries, which touched a record low 1.6714 percent last month, rose 5 basis points to 1.8 percent today after Federal Reserve Chairman Ben S. Bernanke told lawmakers the central bank may take more action to stimulate the economy.

Gaffney, co-manager of the fund with Daniel Fuss at Boston- based Loomis Sayles & Co., said convertible bonds are a “good way of setting up a fixed-income portfolio for the future,” when interest rates eventually rise.

The Loomis Sayles Bond Fund has returned 0.35 percent this year, trailing 80 percent of competitors, after its 13.6 percent gain last year, when it beat 97 percent, according to data compiled by Bloomberg.

--Editors: Pierre Paulden, Mitchell Martin

To contact the reporter on this story: Sapna Maheshwari in New York at

To contact the editor responsible for this story: Alan Goldstein at

The Good Business Issue
blog comments powered by Disqus