Dan Fuss, one of the world's longest-serving fund managers, said his flagship bond fund has cut exposure to high-yield corporate bonds and raised the quality of its holdings, warning that the U.S. bond market is more vulnerable to a sell-off now than at any time since the financial market rout of 1974.

The market has grown less able to absorb selling, in part because market makers are dwindling in number, he said, just as the possibility emerges that European and Japanese investors who once bought heavily will begin lightening up because of the interest rate environment.

Polarized U.S. politics and policy paralysis in Congress also reminds him of 1974, when Washington was rocked by the Watergate scandal and the U.S. bond market suffered heavy losses due to sustained inflation.

The Loomis Sayles Bond Fund has reduced its risk exposure to the lowest since its inception in 1991, with an average maturity around 6 1/2 years, or half the typical duration. The average bond rating is also higher than usual, at A instead of BBB.

"I do know from my 59 years of experience, when the ice was very thin, it's always good to be very cautious," he said. "You can skate around the edges but you can't go out to the middle."

Despite his cautious strategy, he managed a 7.41 percent return as of end-September, matching the 7.4 percent return on junk bonds in the BofA Merrill Lynch U.S. High Yield Total Return Index and more than double Vanguard's Total Bond Index fund.

U.S. high-yield debt has outperformed, drawing in foreign investors even as the U.S. Federal Reserve raises interest rates. The BofA benchmark yield has fallen to 5.57 percent from 6.62 percent in the last 12 months, while the yield on U.S. Treasuries climbed to 2.34 percent from 1.83 percent.

Fuss warned that risks were rising, though.

"I'm not trying to be an 'end of the world person' here, but it is a possibility," he said. "It used to be one percent, now it's a 15 or 20 percent possibility. Would you get on an airplane if there was a 15 percent risk? And that's a good way to ask a person about risk," he said.

This article was provided by Reuters.