Minnesota Shop To Sell Treasuries

  • 09 Mar 2003
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Wayne Schmidt, portfolio manager at Advantus Capital Management, will rotate 5% of the firm's $1.5 billion portfolio, or $75 million, from Treasuries into a combination of corporates and mortgage-backed securities. Schmidt plans this move over the next month, when he predicts the Treasury market will rally to a point where profit taking will make sense. He says that a war with Iraq will produce a flight-to-quality but that the rally will be short lived, as uncertainty will be resolved. His trigger for the move is when the 10-year Treasury drops to 3.25-3.50%. Last Tuesday, the 10-year Treasury had a 3.64% yield.

Schmidt says that he will liquidate intermediate Treasuries with a five- to 10-year maturity, as a rally will cause the curve to be steeper. With the proceeds, he will buy shorter duration MBS and corporates. He will use the rotation as a way to shorten duration in anticipation of higher interest rates looking forward. For instance, with the proceeds of 10-year Treasuries, he will buy seven- to eight-year corporates. With the five-year Treasuries, he will invest in two- to three-year corporate bonds.

Schmidt declined to indicate any particular name or sector for his future corporate purchases. He says he will buy investment-grade rated bonds only. As an example of a recent purchase, he bought the PHH Corp. 7.12% notes of '13 (BBB+/BBB+) at a 330 basis point spread over Treasuries. Last Tuesday, the notes were trading at a spread of 321 basis points over the curve. Schmidt does not plan to add to this position.

Advantus is based in Saint Paul, Minn. Schmidt allocates 48% to MBS, 32% to corporates, 14% to Treasuries and 6% to agencies. With a four-year duration, the fund is almost neutral to the Lehman Brothers aggregate index, which has a 4.10-year duration.

  • 09 Mar 2003

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