Bloomberg News

Top Fund Hoards Easiest-to-Sell Bonds as Yellen Plots Exit

July 29, 2014

Loomis Sayles & Co. is so convinced that bond prices are about to fall that it’s hoarding a record proportion of easy-to-sell securities in its flagship debt fund.

The firm’s $24.7 billion Loomis Sayles Bond Fund (LSBDX:US) has roughly doubled its short-term U.S. and Canadian debt holdings in the past six months to about 27 percent, said Matthew Eagan, who co-manages the fund, which has outperformed 98 percent of its peers in the last five years. The Boston-based asset manager is betting the Federal Reserve’s exit from easy-money policies will force companies and nations to pay more to borrow in the next year.

“We want to be prepared for that to happen,” said Eagan, who manages the Loomis fund alongside Dan Fuss and Elaine Stokes. “The global economy is strong enough to support the Fed’s decision to continue the taper and eventually raise rates by the middle of 2015.”

Fed policy makers, led by Chair Janet Yellen, have been paring their bond purchases since December and begin a two-day meeting today to discuss their exit strategy from a sixth year of near-zero interest rates. While growth has been relatively sluggish, U.S. central bankers face mounting pressure to start backing off from their easy-money policies after inflation accelerated and the jobless rate dropped.

Market Complacency

After prematurely dumping bonds last year on concern that the Fed’s tapering would send borrowing costs higher, debt buyers have grown increasingly comfortable with the idea that rates will remain relatively low for some time. U.S. government notes maturing in 15 years or more have gained 14.3 percent this year, the biggest for the period since 1995, according to Bank of America (BAC:US) Merrill Lynch index data.

Investors are now too sanguine, according to Eagan. The flagship fund has beat 96 percent of its peers with 7.2 percent returns this year, according to data compiled by Bloomberg.

“The market is very complacent right now in terms of the valuations,” Eagan said. “We think they’re a bit stretched.”

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Caroline Salas Gage


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Companies Mentioned

  • LSBDX
    (Loomis Sayles Bond Funds I)
    • $15.47 USD
    • -0.03
    • -0.19%
  • BAC
    (Bank of America Corp)
    • $16.72 USD
    • 0.12
    • 0.72%
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