| NEW YORK
NEW YORK Jan 11 An extended period of rising
interest rates is on the horizon and bond investors should
adjust their portfolios while they can, bond market veteran Dan
Fuss said on Friday.
"I've been saying for a long time that we are in the
foothills of a rise in interest rates," said Fuss, vice chairman
of Loomis Sayles & Co, with $182 billion in assets. "But I'd go
a step further and say there's been a gentle rise in the
Markets pushed long-term Treasury yields higher last week
after minutes from the last Federal Reserve meeting showed some
participants thought it would be appropriate for the central
bank to end an asset purchase program that has kept a lid on
Fuss, who has amassed more than 50 years of experience on
Wall Street, said he worries most about the impact higher rates
would have on high yield, or "junk," bonds issued by companies
with high levels of debt.
Global central bank policies to keep interest rates low have
prompted investors to overlook credit risks associated with some
of these assets as they reach for higher returns, he said.
High demand pushed the average yield on U.S. high-yield debt
below 6 percent this week for the first time, according to the
Barclays Capital High Yield bond index.
"People say credits are getting so much better. That's
baloney sausage. The credit cycle peaked a year and a half ago,"
"What has got better - and it's very helpful to many issuers
who would have had trouble accessing the market - is this push,
push, push for yield ... As long as the flow of funds keeps
coming, it prolongs the life of many marginal credits."
Fuss, who manages the Loomis Sayles Bond Fund, said
that means investors should gravitate toward shorter-duration
bonds and target companies with strong market share and growth
"That will be the key in a rising rate environment," he
said. "Someone might say, 'Well, that sounds like growth
stocks.' That's right. You want the survivors."
Fuss said rates are not likely to rise sharply until the Fed
starts to back away from its commitment to asset purchases and
record low rates but warned that waiting too long will make it
hard to adjust.
"When winter comes, if you're not prepared, you are in real
serious trouble," he said.