State Bank and Trust of Fargo is planning to buy $70 million of callable agency paper in seven to 10-year final maturities over the next few months, in an addition to its existing agency allocation, said Greg Sweeney. He runs $750 million in investment-grade fixed-income from Fargo, N.D., and recently acquired a new $500 million account at the start of the year which was transferred in kind; the addition to agencies is part of a rebalancing of his new portfolio.
As a result of the shift, Sweeney explained he will pick up about 60 basis points in extra yield over non-call agency paper. He added he is not concerned about call risk. "We think rates will continue to rise, which makes the call option worthless," he said.
Sweeney added government paper is attractive relative to corporates, which he believes are overpriced. The manager's allocation to the corporate sector has declined over the past six months by 5% to 65% and at the moment, Sweeney would prefer to buy Treasuries rather than risk spread widening. There is little that is attractive within the corporate arena, but he noted bank and finance paper offers a little bit of extra yield over industrials due to technical factors. The manager has upward of 30% in government paper and 3-5% in cash.
State Bank and Trust is around a year and a half short its benchmark, the Lehman Brothers Intermediate Government/Credit Index. If the 10-year Treasury hits 5%, which Sweeney thinks is its fair value, the manager will start to unwind his short. The 10-year was at 4.55% on March 11.