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Bond veteran Daniel Fuss sees one threat to calm credit markets: a swelling pile of U.S. government debt.
In more than 50 years of working in the investment industry, Daniel Fuss, vice chairman of Loomis Sayles and bond market sage, has never seen corporate bond prices rebound as quickly as they have in the past year, a period in which low-rated bonds have returned 65%. "I've never seen a snap-around like this ever, ever," he said.
Talking between bites at a Loomis Sayles lunch with reporters on Tuesday, Fuss said he sees no immediate danger to corporate credit. Eventually, however, U.S. government borrowing may begin to "crowd out" corporate borrowing, he warned, because the cascade of U.S. Treasury bonds sold to pay for budget deficits will drive government and corporate yields higher.
That threat is probably more than a year into the future, Fuss said. For the rest of this year, he expects to see the spread between corporate and Treasury yields inch tighter, as 10-year Treasury note yields move from the current 3.70% to above 4%.
Aside from Fuss' "crowding out" warning, Loomis Sayles' money managers drew a modestly optimistic outlook for the U.S., with surging corporate profits and an expanding economy. David Rolley, who manages international bond funds, said he would be shocked if the economy grew less than 3% this year.
The U.S. has recently benefited from looking better than Europe. What's pushing the dollar up, Rolley said, is a flight from the euro, prompted by worries that Greece, Portugal and other countries would collapse under their debts.
"The dollar has been trading higher because it's seen as the un-euro," Rolley said. "It's not that people have fallen in love with U.S. prospects. It's that they've fallen out of love with European prospects."
Warren Koontz, who manages Loomis's large stock value fund, named Norfolk Southern ( NSC - news - people ) and El Paso Corp. ( EP - news - people ) as two ways to play an expanding economy. Buying shares in Norfolk Southern follows in Warren Buffett's tracks. His Berkshire Hathaway ( BRK - news - people ) picked up Burlington Northern Santa Fe ( BNI - news - people ) last month, what Buffett reportedly called an all-out bet on the U.S. economy.
Buying shares in El Paso, a natural gas producer, is a wager on "the one commodity that hasn't moved," Koontz said. He expects to see natural gas prices rise from the current $4.52 per thousand cubic feet as the economy picks up.
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