NEW YORK (TheStreet) -- Brazilian government bonds are the most attractive in the world, says Don Quigley of the Artio Total Return Bond Fund (BJBGX). And U.S. Treasuries have lost their allure, he says.The $1.4 billion mutual fund, which owns bonds in sectors including corporates and mortgages, has returned 6.2% over the past year, better than 60% of its peers. Over the past five years, the fund has returned an average of 6% annually, outperforming three-quarters of its Morningstar rivals. 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. Why is Brazil your favorite sovereign bond? Quigley: Simply the yields. The yields in Brazil are very high. We think that the currency will be very stable and what we are doing is basically clipping that coupon. We are not taking a lot of interest-rate risk, meaning that if interest rates do go higher, then we have a short duration bond and it won't be affected by that. In terms of corporate bonds, what is your view of financials? Quigley: You have to be careful of which financials you are in. The insurance companies are probably OK. But I think certain banks could have a big problem. They are still exposed to secondary mortgage loans and that could really be a problem for them. It depends on a couple court cases that are going on right now. What about industrials? Quigley: In the industrial market, I really want to be careful of the emergence of M&A risk, where you see leveraging up of corporate balance sheets to restructure or take over another company. While that is good for equity holders, it's usually poisonous for the bondholders. So we are being careful on the industrial market, sticking with names that have unusual structures or are family owned, or for some reason that it would be prohibitive to have a takeover. Procter & Gamble ( PG), for example, has a balance sheet so big that nobody would be able to lever up that name. What is your view of the mortgage market? Quigley: We actually don't like agency mortgage-backed securities. We don't think they have a lot of value right now. Non-agency mortgage-backed securities are where we are. Those are the private placement ones. These really got crushed in 2008 but they have come back a lot. We think there is a lot more to go and you are getting a lot of yield in these securities right now. If you take your time and know the markets and the underlying asset, we think you can do well in that market.
We have seen U.S. Treasury yields tick higher over the past few months. How high can they go? Is now a good time to reduce a position in Treasuries? Quigley: We are positioned for interest rates to go higher. So we are underweight Treasuries and underweight U.S. duration versus our index. We also have our sovereign positions where we don't feel as if there is as much pressure for interest rates to go up. So we can hide from that interest-rate movement. If I was an individual investor, I would be inclined to be careful and stay within the shorter end for Treasuries. -- Reported by Gregg Greenberg in New York.