Fuss Buying Only Portugal After Calling Irish Debt Rally

By Anchalee Worrachate

Loomis Sayles & Co., the investor that bought Ireland’s government debt before the nation’s 2011 bailout triggered a historic rally, now likes Portugal’s dollar-denominated bonds.
The firm, once one of the world’s largest disclosed holders of Ireland’s bonds, said it bought the Iberian nation’s securities and isn’t interested in other European sovereign debt for the $24 billion Loomis Sayles Bond Fund.
“We bought Portuguese dollar bonds because they are relatively cheap to where they should be,” Dan Fuss, whose Bond Fund outperformed 98 percent of its peers in the past five years, said in an interview in London. “That’s fairly recent. We have dribs and
drabs of European bonds but not national debt. I really don’t see any opportunity there.”
Portugal received a 78 billion-euro rescue ($99 billion) from the European Union and the International Monetary Fund in 2011. Four months ago, it followed Ireland in exiting an aid plan without the safety net of a precautionary credit line. Unlike Ireland, Portugal is rated below investment grade by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s.

Dollar Debt

Portugal’s 5.125 percent dollar bonds maturing in October 2024 fell, with the yield rising 2 basis points, or 0.02 percentage points, to 4.60 percent, at 11:03 a.m. London time. The yield has dropped about 49 basis points since it was issued in July. The nation also has dollar securities due this year and in 2015. Fuss declined to comment on which dollar bonds he bought.
The 2024 Portuguese security was sold via banks in July to yield 260 basis points more than the Treasury 2.5 percent note maturing in May 2024. The yield difference, or spread, was 209 basis points today, according to Bloomberg Bond Trader data.
The dollar has gained about 8.4 percent against the euro this year, rising versus all of its 16 major peers.
Loomis Sayles is a Boston-based unit of Natixis Global Asset Management, which has about $930 billion in assets under management. Fuss’s Bond Fund returned an average annual 9.65 percent in the last five years, compared with 5.1 percent at Pacific Investment Management Co.’s Total Return Fund, the biggest bond fund, run by Bill Gross before he left last week for a rival manager, according to data compiled by Bloomberg.
Fuss said that his open-end Bond Fund holds a record 27 percent of its money in short-term reserves, including securities from U.S., Canada, Australia and New Zealand. He wants to be well-positioned should the U.S. Federal Reserve delay increasing borrowing costs due to escalated geopolitical tensions, even as many of his competitors don’t expect that scenario.

Fed’s Mandate

“The situation in the Middle East has gone from bad to worse to awful to tragic,” said Fuss, who turned 81 on Sept. 27. “The Fed’s mandate doesn’t say anything about geopolitical risk, but I think the role of the central bank is implicitly expanded further into that realm, and they are very concerned about the health of the economy and markets.”
There’s was a 78 percent chance the Fed will raise its target for overnight lending between banks from a range of zero to 0.25 percent by its September 2015 meeting, Fed funds futures data compiled by Bloomberg showed Sept. 26. The probability was 68 percent at the end of the second quarter.
Cleveland Fed President Loretta Mester said on Sept. 24 that while the U.S. economic progress would argue for earlier liftoff and more rapid rate increases, risks include weakness from some economies abroad and geopolitical concerns.

Irish Sales

Loomis Sayles sold at least part of its Irish bond holdings last year, according to data compiled by Bloomberg. The company started buying Irish debt in the third quarter of 2010. That’s when it was at distressed levels, as the nation’s bond yields soared and the country’s banks came close to collapse.
Irish bonds have gained about 65 percent since the end of the third quarter of 2010 through Sept. 25, according to Bank of America Merrill Lynch Bond Indexes. Fuss declined to comment on returns his Bond Fund made on the investment.
The Loomis Sayles Bond Fund (LSBDX)’s biggest two holdings as of the latest disclosure were 2016 Treasury notes, according to data compiled by Bloomberg as of June 30. No Portuguese debt registered among the top 10 holdings.