Piedmont Capital Management Associates is looking to add some $15 million to corporate bonds in sectors such as utilities and Baby Bell telecommunications companies. Walter Campbell, portfolio manager of $150 million in taxable fixed income, says the move would be a bid to capture yield in areas of the market that have been beaten up relative to their historical performance and that of U.S. government securities. Piedmont would fund the purchases with cash from callable agencies when they are called. As a trigger for the trade, Campbell is waiting for a sell-off in corporate bonds. If spreads remain more or less unchanged, he will add only $7.5 million in corporates and put the rest back into callable agencies. Campbell says he prefers callable to non-callable agencies because they offer more yield.
Among utilities, Campbell says he would consider names such as AES Corp. and Calpine Corp., though he is open to other names as well. The AES 9.5% notes of '09 (B3/B-) were trading at 70 last Monday. The Calpine 8.5% notes of '11 (B1/B+) were trading at 44.
Campbell says the recent passage of a rule by the Federal Communications Commission may have created a buying opportunity for Baby Bells, including BellSouth, SBC and Verizon. The rule requires that the Baby Bells lease part of their networks to long distance carriers at a discount, and was widely seen as a setback to the Baby Bells. Campbell says he would not yet consider buying the bonds of Qwest Communications until he sees further evidence of a turnaround.
BellSouth's 6.125% notes of '08 (Aa2/A+) were trading at 125 basis points over Treasuries last Monday. SBC's 6.25% notes of '11 (Aa3/Aa-) were trading at 187 basis points over Treasuries. Verizon's 5.875% notes of '12 were trading at 95 basis points over Treasuries. Qwest's 7.5% notes of '08 were trading at a dollar price of 82.5.
The Hilton Head, S.C. firm does not follow a bogie, but keeps duration at roughly eight years. It allocates 60% to U.S. agency debentures and 40% to corporates.