U.S. Economy, Bernanke 'Muddling Through'

The Fed chief doesn't quite get what's happening, but there are bright spots amid the doldrums.
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LOS ANGELES (TheStreet) -- Corporate and select mortgage-backed bonds will offer the best fixed-income returns as the economy struggles to get its footing, says Thomas Atteberry, manager of the FPA New Income Fund (FPNIX) - Get Report.

The $4.2 billion mutual fund is up 2.3% this year, leading 98% of its rivals. FPA New Income Fund has risen an annual average of 4.6% over three years and five years, but with erratic results. It topped 4% and 22% of its peers, respectively. The fund has returned 3.3% over the past year, according to


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Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

Is the economy going to double dip?


Whether it's an actual double dip when you go back into a recession is immaterial as much as the economy is going to slow down. You're going to have a sort of subperiod of muddling through you continue to work through the debt problems that you have and deleveraging.

Do you think the so-called bond vigilantes are going to strike? And if so, how soon?


It's difficult to know when someone strikes. As we think about government debt, they never repay it, they just refinance it. And so as long as there's a trust that you can pay them, there really isn't much of a problem. But the minute that trust comes into question, that's when that "vigilante" sort of phrase comes to mind. It's hard to know when it is, other than the fact that I think that we are along the path where that's going to happen someday until we get control of the amount of debt the government's taking off.

The Federal Reserve and Chairman Ben Bernanke have sounded less confident about the recovery of late. What are you hearing from the Fed?


I'm hearing that they're struggling to handle deleveraging versus the traditional cyclical downturn of the economy where inflation and utilization got too high. Many of the tools they've used in the past aren't going to work as well. Bernanke did not seem to completely understand why people are not borrowing money, like it was a question of whether they had access to credit. Surveys say small businesses have access to credit, they're just not interested in borrowing money.

Is now a good time to be in corporate bonds, considering all that cash on corporate balance sheets?


Looking forward, because the economy's growth has come into question, we've seen the spread widening on corporate assets. And it looks like it will present an opportunity to make some targeted investments. I don't think you can make a blanket statement all corporate makes sense as a sector, but you can find ideas. It might be a double B, a triple B or a single A that you'll find. We also think you do need to continue to be sort of a five-year in maturity because they are still taking on a tremendous amount of interest-rate risk given the absolute low levels that we find ourselves for interest rates today.

Are mortgage bonds a good sector to be in?


We have a significant mortgage allocation we've had for several years. But it's 2003 vintage and older mortgage product. It's agencies,

Fannie Mae


Freddie Mac

. We look at a 15-year mortgage and realize in 2003 it was a refinancing, so loan to value on it was 70% and less. That means even with a decline in housing, it's back to 2003 levels. I still have that sort of 70%-to-80% loan to value. In 2003, it was also much stricter as far as underwriting standards, so we have fully documented loans. These people have nine years left on that mortgage. Chances are much greater that they're not going to refinance as much as just pay the mortgage off and then own the home free and clear. We think that's a good defensive mortgage investment to make.

-- Reported by Gregg Greenberg in New York.

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Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high-net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.