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Loomis’ Fuss Cuts All Treasury Holdings, Echoes Gross’ Warning

Dan Fuss, whose Loomis Sayles Bond Fund beat 95 percent of competitors the past year, said he sold all of his Treasury holdings because of prospects interest rates will rise as the U.S. borrows unprecedented amounts.

“The fundamentals are awful,” Fuss said in a telephone interview yesterday from Boston. “The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury. Do you really want to buy the debt of the biggest issuer?”

Fuss said he doesn’t own Treasuries in any of the investments he is directly involved with after selling the last of them this week. Loomis Sayles cut the securities to the lowest possible amount in funds with liquidity requirements or a minimum mandated level of U.S. government debt, he said.

His comments echo those of Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. and warned in his investment outlook for June that the U.S. is in a “debt super cycle.” Moody’s Investors Service said this week the U.S.’s top bond rating will come under pressure unless the government takes steps to reduce projected record budget deficits.

Treasuries rallied this month as the spreading credit crisis in Europe led investors to seek the relative safety of U.S. securities. Government debt returned 1.95 percent in May as of yesterday, heading for the biggest monthly gain since March 2009, according to Bank of America Merrill Lynch indexes.

The yield on the benchmark 10-year note rose three basis points to 3.23 percent as of 6 a.m. in London, according to data compiled by Bloomberg. The 3.5 percent security due May 2020 fell 10/32, or $3.13 per $1,000 face amount, to 102 10/32.

Record Debt Sales

The yield dropped to 3.06 percent on May 25, a level not seen since April 29, 2009. It may rise past 4 percent next year as the U.S. government sells record amounts of debt, Fuss said in a Bloomberg Television interview March 31.

“Treasuries are clearly the safest place to be other than cash if you want to quickly raise money,” he said yesterday. “They are the riskiest place to be if you’re concerned with, in our mind, the longer-term trend.”

Fuss’s Loomis Sayles Bond Fund returned 27 percent in the past 12 months, Bloomberg data show. Loomis Sayles, based in Boston, oversees $145 billion.

President Barack Obama has increased U.S. marketable debt to a record $7.9 trillion to fund spending programs, fueling speculation the supply of Treasuries will outstrip demand.

The U.S. budget deficit, which rose to $1.4 trillion in fiscal 2009, will drive Treasury sales to a record $2.43 trillion this year, according to a February survey of bond- trading companies.

‘Silly Risks’

Fuss said his best guess is that figures such as these will send Treasuries down by year-end.

“It’s silly in our opinion to take extreme market risk for a low return,” Fuss said.

Gross, co-chief investment officer at Pimco, said Treasuries are benefitting for now as investors seek secure places to put their money.

“During the many liquidity crises, such as we’ve seen over the last week or two, you want to put it in a safe-haven type of sovereign,” Gross, who is based in Newport Beach, California, said on Bloomberg Television yesterday. “The United States is that at the moment, but as I’ve suggested, that won’t always be the case. Investors have to be leery going forward.”

The government’s finances have been “substantially worsened by the credit crisis, recession, and government spending to address these shocks,” Moody’s analysts led by Steven A. Hess wrote in a report May 25. “The ratios of general government debt to GDP and to revenue are deteriorating sharply, and after the crisis they are likely to be higher than the ratios of other Aaa-rated countries.”

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