See article: Fund manager: US Treasurys not worth the risk Published: Sunday, 27 Nov 2011 | 12:29 PM ET Text Size
NEW YORK - The world's bond buyers have turned on Europe's deeply indebted governments and fled to another deeply indebted government across the Atlantic -- the U.S. As a result, U.S borrowing costs have plunged to historic lows while rising rates in Europe have many worried about a catastrophic financial crisis.
The European debt crisis has made the U.S. Treasury market the world's most popular spot for bond investors. But Kathleen Gaffney, co-manager of the $19.1 billion Loomis Sayles Bond fund, refuses to join them.
Gaffney concedes that over the course of a few months or even a year, it might look like a bad move. The Loomis flagship fund dropped 5 percent in the three months starting in July, while the benchmark bond index gained 3.8 percent. Like bond giant Bill Gross at Pimco, she avoided U.S. government debt and refused to follow the rest of the world into Treasurys this summer. The Treasury rally has pushed the Barclay's index up 7 percent this year, compared with her fund's 3 percent gain.
But Gaffney is used to getting the big picture right. The $19.1 billion Loomis Sayles Bond fund she helps manage has rewarded investors with an average 10 percent return each year for a decade. Morningstar and Lipper both rank it in the top tier of bond funds.
So Gaffney plans on sticking to her call. With Treasury yields below 2 percent, U.S. government debt isn't worth the risk. And what if other bond buyers eventually sour on U.S. Treasurys just as they have European government debt? For now, she'd rather buy corporate junk bonds.
In a recent interview, Gaffney talked to The Associated Press about why she avoids Treasurys, the prospect of another credit-rating cut for the U.S. and the appeal of Canada.
Q: If you could go back in time and get a chance to do it all over again, would you load up on Treasurys and sell them back to everybody else in August?
Nope. Not at all. We're not trying to win a popularity contest. It's really about the yield. You'll never get good long-term returns if you park your money in bonds paying less than 2 percent. The best way to have success is to follow your long-term perspective.
Q: So how much in Treasurys do you hold now? Your benchmark index is about 50 percent Treasurys.
We have no Treasury position in the fund. None of any kind. It's been that way since March. They're the least attractive asset class for the long term. They're return-free (they pay less than the annual rate of inflation). They're also very risky because rates will eventually go up.
Q: How do you replace U.S. government bonds?
The alternative that we've found is Canadian government bonds. They make up about 9 percent of our fund. It's a deep market. But it's really the natural resources that we like. Countries that export natural resources such as oil and metals are tied to rising commodity prices. They can protect against inflation. We also like Australia and New Zealand. Like Canada, their government budgets are in sound shape. And they export more than they import.
Q: Will the Congressional supercommittee's failure to reach an agreement on $1.2 trillion in budget cuts affect the Treasury market? Automatic cuts are supposed to start in 2013, but some Republicans have said they'll try to stop that from happening.
The concern is what do they do now. I think Congress is going to find a way to repeal the automatic spending cuts. The rating agencies would not look kindly upon that. We'd be looking at another downgrade for U.S. Treasurys. After the downgrade from S&P in August, Treasurys continued to act as a safe haven. This time the market may not be as kind.
Once again you are confusing a long term bond objective with a medium term bond fund - PTTRX. Of course a long term bond fund will have a higher rate of return. The comparison is apples to oranges. Both types of funds are constrained by the funds investment objectives.
If your point is that there are better places to have invested your money this year you are probably right. But this fund has always been a consistent intermediate bond dividend play and nothing else.
I only consider NAV valuations when I see a big move in the markets hence a trading opportunity. Otherwise, I'm in it for a consistent yield with a view towards maximizing the number of owned shares. Gafine and everyone else will get burned in a worst case scenario as it won't matter what term bond you are holding-they will all be worthless.
Someone in a prior post asked me about trading strategies for my portfolio; when PTTRX got over 11.00 it was too pricy for me and I moved into a DJA ETF. When the market approached 12,000 I moved back into PTTRX. As it turns out it is nearly a wash but slightly ahead if I had done nothing and much better off if I had remained in the DJA ETF. I worry too much about the liquidity of any Stable Income Fund to park money there for long.
There has been a pattern of SIF's going bankrupt due to automatic liquidation events which occur when the securities underlying the SIF fell below 95% of par value. So when posts refer to a "cash position" they are usually speaking about a SIF which is for the most part invested in the very thing you should be avoiding-SDO's, CDO's and Synthetic Wraps. What's worse the FDIC has called into question whether a bankrupcy of a SIF is covered by the FDID or SEC.