If he was going to tweak a 60/40 portfolio in today’s rising interest rate world, Loomis Sayles Vice Chairman Dan Fuss would be inclined to tilt the stock-bond mix towards equities.

Fuss, who ran Yale University’s endowment in the 1970s, doesn’t think stocks are cheap at all. But he has some serious concerns about bonds. In particular, he sees a “distorted relationship” between long-term bonds, high-yield bonds and yield-oriented stocks.

As income-starved investors pile into the junk bond market, Fuss doesn’t especially like what he sees. The high-yield market “is starting to act funny,” he observed.

For a single day earlier this month, certain junk bond indexes fell below 4% for the first time in history. On February 22, State Street’s junk bond ETF (JNK) yielded about 5.1%. BlackRock’s rival ETF (HYG) yielded 5.1%.

Asking whether these yields are justified “on the basis of credit,” Fuss's verdict is, “Certainly not.”

Both stocks and bonds have done extremely well for decades. But Fuss implies the long-term outlook for bonds is somewhat more worrisome than it is for stocks.

Like many money managers, he doesn’t think it is improbable that inflation could surprise investors on the upside. Unlike other managers, he thinks the inflation quandary extends beyond fiscal and monetary stimulus.

Deglobalization already was well underway before the pandemic struck, as evidenced by Brexit, the election of former President Trump and nationalist movements all over the world. But Covid-19 prompted numerous CEOs, many of whom were free traders by nature, to rethink their supply chains with an eye to bringing them closer to home.

Fuss acknowledges this is a process that will take five years and, in some cases, increase costs. A number of American companies already were engaged in moving production out of Asia and “near-sourcing” in Mexico back in 2017.

When it comes to designing balanced portfolios, Fuss said it is possible to shift funds out of bonds into stocks without sacrificing yield. Several years ago, the Loomis Sayles Bond Fund he co-manages took a sizeable position in AT&T stock.

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