Best Bond Buying Opportunity in 50 Years?

SmartMoney magazine named bond mutual fund manager Dan Fuss one of the “World’s Greatest Investors” last August.  His funds have been hit pretty hard lately, along with everything else, but in this interview with SmartMoney he strikes a number of themes that resonate with my outlook.

I have no idea what lies ahead for the stock market in the U.S.  No one does.  “It will fluctuate” is the best response I’ve ever heard to the question of what the stock market will do in the future.  But, it seems reasonable to believe that times will be tough in the markets as we work through one of the greatest financial crises this country has ever seen.

Given that, it seems prudent to look for safer investments, ones that will pay a decent income stream as we wait for some level of stability to return to the markets.  Many corporate and municipal bond funds are paying better yields that at any time in memory.  Further, they offer an excellent potential for total return as prices return to par; potentially even better than stocks.  As Fuss states,

I’m pretty sure stocks are bottoming now. I will use the 1974 analogy. Stocks bottomed the first Friday of October 1974. The economy really weakened in 1974, thanks to the oil price hikes and other bad news, and stayed weak throughout 1975. But then 1975 was the best-performing year for stocks I had ever seen in my career up until that point. Corporate bonds did even better. I think we’re in for another year like that, maybe even better. Stocks will do well, but I think corporate and even municipal bonds will do better.

Many investors at this point are only comfortable with Treasuries.  Fuss believes that this is short-sighted.

Even if you assume that bonds default at the same rate as they did in the Great Depression, and fewer of those defaulted bonds actually recover their value, you will still outperform Treasurys.

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