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Bernanke: More As on His Report Card


Earlier this week I blogged about what grade Kenneth Volpert, Vanguard’s bond index guru, would give to Ben Bernanke’s performance thus far.

I’m going to stick to this theme for a while and ask other money managers what they think of Bernanke. On Thursday afteroon, I had a chance to sit down and chat with Kathleen Gaffney, co-manager of the $14 billion Loomis Sayles Bond Fund, to see what is on her mind right now. Although they don’t get as much attention as PIMCO’s Bill Gross, Gaffney and co-manager Dan Fuss are considered to be among the most savvy fixed-income managers in the world. Although Morningstar doesn’t classify these two funds in the same bond category, they both tend to do quirky, interesting stuff. Loomis Sayles Bond owns a lot of foreign debt (including Indonesia!), and it is up almost 7% year-to-date. The $104.4 billion Pimco Total Return fund is up 4.75%. Manager Gross has been calling for a rate cute for the past year, and he sees more cuts ahead.

Cutting the Fed Funds rate target by 50 basis points was a “big, bold move,” Gaffney says. Yet while the markets are enjoying a period of “eerie calm,” she expects more leverage and risk to bubble to the surface in the fixed-income market. The big problem is that many of the bad positions in portfolios are lurking overseas, and the Fed doesn’t have a lot of ability to control the global environment.

One other interesting tidbit she flagged is the spread between LIBOR and the Federal Funds rate. I didn’t realize how closely these two benchmark short-term interest rates move in lockstep. Typically, the difference between them is a mere five to 10 basis points; now it is closer to 45 basis points. Gaffney sees this as a sign that there is more turmoil ahead. Hopefully, the Fed’s move to cut target the Fed Funds rate and restore calm will give folks a chance to unwind from the bad investments, she says. “It buys everyone a little time,” Gaffney says. As for Bernanke, she rates his performance thus far an A.


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