Graff said he prefers single-A finance credits to triple-B industrials because of their attractive yields and stable prices, and the fact that they offer better yields for less risk. For example, Graff recently passed on First Data Corp. '14s, which were trading at 65 basis points over 10-year Treasuries, and Pitney Bowes '14s at 56bps over. Instead, he purchased Goldman Sachs' 5.13% of '14s, which were trading at 100bps over at the time of purchase and are currently holding steady at 99bps over Treasuries. He said the case is indicative of his strategy.
With a cautious Federal Reserve and expectations for rate hikes already priced into the market, Graff said he would put new cash into one- to two-and-a-half year taxable municipal bonds, which have a spread of 35-40bps over comparable Treasuries.
The company's fixed-income portfolios are invested in all segments of domestic investment-grade bonds, including Treasuries, agencies, mortgage-backed securities and taxable municipal bonds. The firm uses several indexes as benchmarks, most notably the Lehman Brothers Aggregate Bond Index. The portfolios are 10% overweight the index in mortgage-backed securities, 15% overweight in corporate credits, 2% underweight in agencies and 20% underweight in Treasuries. The portfolios are at about 80% of the benchmark's duration.
Graff explained the significant underweighting in Treasuries by saying that he's trying to counter the lower yields of shorter securities by seeking out bonds with slightly higher risk. "The biggest risk in the bond market right now is interest-rate risk," Graff said.