Joe Zarr, portfolio manager with Meeder Financial, will increase the firm's Treasury bond duration from 2.0 years to 6.5 years if the 10-year Treasury yield rallies to a 4.90% target yield. As of last Monday, the 10-year Treasury was yielding 5.09%. He plans on moving the entire Treasury allocation--currently 90% of the portfolio, or $180 million-- reasoning that conditions will be there for a sustainable Treasury rally, but declined to specify what would spur this rally.
Zarr says the 4.90% yield bogey is arbitrary, but notes that it is congruent with his firm's primary mission of capital preservation. A 4.90% yield would, however, indicate that the market is firmly committed to a rally, justifying his extension trade. He continues that the duration move will allow the manager to capture price appreciation while locking in an attractive current yield. He anticipates that longer rates will decrease and the 10-year Treasury will reach his target level after the market corrects its expectations of a sharp, or V-shaped, recovery and its fears of higher rates of inflation.
Zarr manages the portfolio out of Dublin, Ohio. The asset allocation is 90% Treasuries and 10% agency debentures. The fund duration is 2.0 years, versus 3.50 years for its bogey, the Lehman Brothers intermediate government/corporate index.