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Let’s Meet the 2008 Bond Manager of the Year

Posted by Larry Doyle on April 8, 2009 3:09 PM |

One of our Economic All-Stars is Bob Rodriguez of First Pacific Advisors. In the spirit of being totally equitable, I should have also posted Tom Atteberry’s name next to Bob’s. Bob and Tom were jointly named 2008 Morningstar Fixed Income Managers of the Year.

Bob is currently taking a leave of absence from First Pacific but Tom is equally outstanding. I had the pleasure of making his acquaintance while I worked at JP Morgan. Tom Atteberry is a pro’s pro. He spoke to Bloomberg earlier today and made these comments, which I took in longhand, so I am not quoting but I listened very carefully. Tom opined:

1. The current environment is the worst time to get into bonds. Why?

2. The creditworthiness of individuals and companies across the economy will only get worse from here and that deteriorating credit is not currently priced into the market.

3. U. S. government debt (Treasuries) represent NO value at current levels. If a fair expected rate of return is between 2-3% and a longer term rate of inflation is also between 2-3%, the rate on a 10 yr. maturity Treasury note should be in the vicinity of 5%. That note is currently trading at 2.85%. Don’t overpay for an asset just because somebody else is, in this case the Federal Reserve.

4. What happens when the Fed tries to sell assets to shrink their balance sheet and drain liquidity from the economy? Those assets will quickly decline in value.

5. The agency mortgage-backed securities market (Ginnie Mae, Fannie Mae, Freddie Mac) also represent little to no value for the same reason as the Treasury market. The Federal Reserve is overpaying for this product in an attempt to keep the rates low and spur refinancing.

6. PRESERVATION of CAPITAL remains the “rule of the road.” Accomplish this by maintaining a higher percentage of cash and by owning short maturity, high quality bonds.

7. Atteberry’s fund owns a large percentage of “seasoned” mortgage product. The key term being “seasoned,” as the underlying mortgages were underwritten in 2003 or earlier when the market demanded strict underwriting guidelines for conforming and Jumbo mortgage product. The original LTV (loan to value) was in the 70-80% range. The current values on the home are close to the point of origination so the homeowners are not “under water.”

8. Atteberry does not see the economy turning around soon so he cautions investors not to be in a rush to enter the market.

9. He also believes the consumer is acting very rationally at this point by increasing the savings rate. That increased savings rate is in our country’s long term best interest so that we are not dependent on foreign capital to finance our deficit.

No pandering, no nonsense. I thoroughly enjoyed hearing from Mr. Atteberry, the consummate investment professional and hereby designated an Economic All-Star at Sense on Cents!


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