Pat Moon, portfolio manager with Meridian Management, is rotating 10% of the firm's portfolio, or $12 million, from Treasuries into corporate bonds on the view that corporate spreads are back to their pre-November spread levels. Moon reasons that even if corporate spreads remain fairly wide, due to accounting fears, the pick-up in income on the coupon is significant enough to warrant the move. But, with recent positive economic news and inventories at their lowest levels since the early eighties, Moon anticipates corporate spreads will tighten and Treasuries will drop in price.
Meridian recently bought the General Electric 8.12% notes of '12 (Aaa/AAA) on a new issue basis at an 80 basis points spread over Treasuries, which he considers to be an attractive level for triple-A rated bonds. Last Tuesday, those notes yielded 99 basis points over Treasuries. He also bought the Ford Motor Credit 6.12% notes of '06 (A3/BBB+) at a 270 basis points spread over Treasuries, because the credit warrants a little bit of extra risk, he says. It was trading at 275 basis points over the curve last Tuesday. Moon is also considering buying Tyco International 6.37% notes of '05 (Baa1/BBB) on the view that spreads have widened by 400 basis points based on news he believes has little credit significance. Moon is waiting for confirmation the paper will not be downgraded as it is now on credit watch.
Moon will finance the purchases with the sale of one- and five-year Treasury bonds, predicting that value will be on the five to 10-year part of the curve. He says that this is because the curve is at its steepest level since 1993 and should flatten within a year from now, with interest rates beginning to move up.
The Little Rock, Arkansas-based portfolio manager oversees a $120 million portfolio, with an allocation of 50% corporates, 40% Treasuries and 10% agencies. With a five-year duration, the fund is shorter than its bogey, the Merrill Lynch Government/corporate master index, which as a duration of 5.30 years.