Steven Jones, portfolio manager with Missouri Valley Partners, says that when the 10-year Treasury yield rises to 5%, he will extend the portfolio's duration to 4.30-years from its current 3.90-year duration, or 10% longer, by adding Treasuries. Jones says last Monday's 4.28% Treasury yield is not sustainable, citing his firm's bullish economic forecast. Jones adds that when he hits his 10-year Treasury yield trigger, he will rotate 10% of the firm's portfolio, or $80 million, into 10-year Treasuries. He will finance the purchase by using cash and selling high-grade corporates.
One reason Jones gives for selling corporates is that the firm's portfolio is overweight the sector, holding 46% of the portfolio in corporates versus the 25% weighting of the Lehman Brothers aggregate index. Another factor is that Jones anticipates that with the future economic recovery, corporate spreads will tighten to a point where the sale will make sense. Jones has identified General Electric 6.87% of '10 (Aaa/AAA) which last Monday traded at 110 basis points over the curve. Jones would sell it at 70 basis points off the curve. Another name is Bank of America 7.80% of '10 (Aa3/A) which had a 186 basis points spread over the curve, last Monday. Jones believes that if the Treasury yield hits his 5% target, he may be able to liquidate this name at a 75 basis points spread over the curve.
Jones manages a $800 million portfolio out of St Louis, Mo. He allocates 46% to high-grade corporates, 42% to mortgage passthroughs, 6% to Treasuries and 6% to cash.