Fixed income
Interview: Waddell & Reed Bond Fund---Cusser, James---Portfolio Manager
>> many investors have turned to real estate hedge funds hoping they’ll provide protection from the ups and downs of the stock markets. now the state of new jersey is considering doing the same and skeptics are lining up. new jersey has $62 billion in pension money now held in stocks and bonds. that fund lost $6 billion in the third quarter last year and has been down as much as $20 billion from its high of $76 billion in august of 2000. so last week the state treasurer sent letters to 24 consultants asking for their proposals. one segment of 93 public investment estimates found 75 invest nd real estate and 60 in hedge funds were private equity. in new jersey the proposal has brought criticism from state unions. they contend state leaders could contend looking on wall street doors looking for campaign contributions. other critics contend there are no sure bets and point out many hedge funds closed last year when their funds plunged. new jersey says they have to do something to boost their returns and expect to hire an pension fund consultant in october. treasury notes up for first day in six. yields on 10-year treasuries have risen 1.5% from a 45-year low in mid june. jam custer is portfolio manager at waddell & reed’s bond fund joining us from overland, kansas to give us his view of fixed income.
>> hi, lane. how are you?
>> very good, sir. let’s talk about your view at this point.
>> ok.
>> we’ve seen good economic data recently. the question for many people, where will the treasury yield go from here, given the economic data we’ve been getting?
>> i’m probably looking for higher rates here as we have an improving economy. there is not much you can do as a bond investor about that. but there are other bonds such as corporate bonds, especially junk, mortgage bonds, and even agency securities that are providing some good relative value here. much depends―everything depends upon your asset class selection as well as your maturity choice.
>> where do you think the treasury yield will go? take the 10-year, what is your expectation?
>> it could be another 25 basis points between now and the end of the year.
>> uh-huh.
>> that again assumes that as i do, that economy will be improving here.
>> why are --
>> according to the 2004 elections.
>> is it very simply just an obvious thing that with the economy gaining, the treasuries will be losing, is that why you are least bullish on treasuries here?
>> well, no. i’ve been in the business too long to think that anything is really too obvious about this particular game. but it looks to me that we were at historic lows in terms of interest rates, and treasuries represented that. however, we do still see some very good value in mortgages and select corporate bonds.
>> and corporates are at the top of your list here.
>> right.
>> if you were forced to list, corporate firsts, mortgage backed securities, agencies third, treasuries adistant fourth. you are most bullish on corporates. what is your outlook.
>> we saw a deal today by toll brothers that brought about 150 basis points over the 10-year treasury. ford motor had a good day. they were in another five or 10 basis points today on the continually good economic news. for a 10-year ford bond i think you are getting about 260 basis points over the comparable maturity treasury. those are at very wide levels. again it’s an economically sensitive area, but you still can get on a single a type of corporate bond you are getting 150 to 200 basis points over the yield curve and that’s very good.
>> isn’t ford its own case because of the massive liabilities it faces right now?
>> sure.
>> i mean it has a very specific set of problems it has to face, and that’s why you are getting that extra yield.
>> exactly. and that’s my point. again, we can’t do much about interest rates generally speaking, but we can be very selective in terms of our credits. and that’s where we do an awful lot of research to find those values like ford. i’m long ford, but it’s in four to five years to maturity. taking a look at their assets and liabilities out for the next several years.
>> and that doesn’t concern you at this point, because there are people out there that take a look at ford and say if not for its name and the business that it’s in, and a lesser company with a lesser name would be in much more serious trouble right now.
>> exactly. but they are ford, and i don’t want―it’s terrible to make comparisons, so continental illinois was kind of big, too. and i don’t think ford is a continental illinois, but nevertheless there are good pickings out there for people who care to do the research.
>> mortgage backed securities, do you expect to see continued growth here?
>> right.
>> are people wondering what’s going to be happening refinancing? a lot of predictions as soon as the rates go up more the refis are going to go up. how is the market going to look.
>> precisely. that’s why you getting paid so much for these mortgages these days. you are getting about 225 basis points over a five-year treasury. now, obviously the problem is in the volitility of the market. you wouldn’t be getting that much yield on a aaa bond if it weren’t for the volitility. the volitility in this last couple weeks was―looked an awful lot like the volitility we saw in the last quarter of 2001. simply because of that volitility in the market, we are getting really cheap cheap mortgages right now.
>> ok.
>> if you are in for the long run, good idea.
>> dame cusser, good idea. portfolio manager at waddell & reed. german business confidence has been climbing.
