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.

There were several reasons he preferred the venerable phone company’s stock to its bonds. One factor was that the stock yielded about 7.0% while the bonds yielded just over 4.0%.

Another factor was liquidity. The time it might require for a multibillion-dollar bond fund to exit a major fixed-income position could take several days. Dumping a similar size stock position could be achieved in a few hours.

It goes without saying that yield is never a primary reason to buy a stock. But Fuss notes some companies combine good yields with sound fundamentals. Those include some biopharma giants like Johnson & Johnson, Merck and Pfizer. Johnson & Johnson's dividend is about 2.5%, Merck's is 3.5% and Pfizer's stands near 4.5%.

“In some cases, the stock is a lot more attractive than the debt,” Fuss says. After the financial crisis, a smorgasbord of companies ranging from Clorox to Microsoft had bonds selling at similar yields to their stocks' dividends. That was before a decade-long bull market.

Nonetheless, the calculations involved in stocks are very different than fixed-income securities. With a bond, the decision involves determining a company’s ability to service and pay back its debt.

Analyzing a stock involves evaluating more variables. “In some cases, the stock is a lot more attractive than the debt,” Fuss said. But when it comes to buying stocks, “I have a very strong bias towards a strong balance sheet, good market share and good growth prospects.”

But over the long term, the dividend can compound dramatically. Bonds just don’t do that.