Dan Fuss is joining Bill Gross in shunning long-term debt before the Federal Reserve starts tapering its bond purchases.
Fuss, whose Loomis Sayles Bond Fund is trouncing almost all of its peers, said he is “greatly reducing” long-maturity bonds. Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., recommends short-term debt.
“What we’re doing to prepare for what we think is the rise in interest rates, without reducing, in the case of the mutual funds, the monthly dividend, is greatly reducing our position in long maturity, very high quality” debt, Fuss told reporters at a briefing today in Tokyo. “We’re focusing as we always do on improving credits.”
The aversion to long-term bonds highlights the challenge the Fed faces in tapering without pushing up borrowing costs as it prepares to scale back the debt-purchase program it used to help the economy through the last recession in 2008 and 2009. Treasury 10-year notes headed for their worst annual performance in four years before the government sells $21 billion of them today in its last sale of the securities for 2013.
Shorter maturities “are less susceptible to higher interest rates” as the Fed, the biggest buyer of longer-dated Treasuries, is poised to taper, Gross said Dec. 6 on Bloomberg Radio.
The Loomis Sayles Bond Fund, based in Boston, returned an average of 8.5 percent annually over the past three years, according to data compiled by Bloomberg. The gain beats 97 percent of its competitors, based on the figures. Fuss, Matt Eagan and Elaine Stokes run the $21.9 billion fund, according to the company website.
Pimco’s Total Return Fund gained 4.7 percent annually over three years, beating 75 percent of its peers, the data show. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.
Ten-year notes have fallen 6.8 percent this year, the most since a 9.7 percent loss in 2009, according to Bank of America Merrill Lynch indexes.
Yields, benchmarks for company borrowing costs and mortgage rates, climbed more than 1 percentage point as traders prepared for the Fed to reduce its bonds purchases. Ten-year yields were little changed today at 2.81 percent as of 8:33 a.m. in London.
Treasuries due in one to three years have returned 0.4 percent in 2013, based on the Bloomberg World Bond Indexes.
The Fed’s next meeting is Dec. 17-18. Policy makers are considering reducing their debt purchases “in coming months” if the economy improves as it expects, minutes of the central bank’s last session released in November showed. The Fed buys $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs.
Chairman Ben S. Bernanke said last month the Fed will probably hold interest rates down long after ending the bond purchases.
The Federal Open Market Committee will probably begin reducing its bond buying this month, according to 34 percent of economists surveyed on Dec. 6 by Bloomberg, an increase from 17 percent in a Nov. 8 poll.
Fuss said he sees a 10 percent chance of the Fed tapering its bond purchases this month, whereas he previously put the odds at 70 percent. One reason is the storm that triggered National Weather Service advisories from Tennessee to Massachusetts and dropped about 2.5 inches (6.4 centimeters) of snow in the Bronx borough of New York City yesterday.
“Here we are in the key part of the Christmas season, and you get a weather event,” Fuss said. “if I were them, sitting inside their office in Washington watching cars out on the street skid into each other, I’d say: Wait a minute. Time out. Let’s push this out.”
“The first stop would be March,” he said.