Merganser Capital Management is planning to go 10% over its benchmark's duration because the firm is bullish on short-term bonds, says Douglas Kelly who manages a $2 billion of short term bond portfolio. The steepening of both the yield and credit curves allows for an extra pick-up in yield and spread, which is why he is extending the term of his picks.
Kelly typically extends out the curve by swapping short-term corporates (less than 13-months) into the two- to three-year range within the same credit, picking up additional yield. For instance, he recently traded out of the 4.95% International Lease Finance (A1/AA-) notes of '03 into the '04s, for approximately $20 million, which lengthened his duration by 0.05%. He was also able to pick up 40 basis points in trading Hydro-Quebec (A2/A+) bonds of '03 out of a February maturity into a July term. He explains that for some global bonds, trading out of short-term, which are often considered very liquid, into the medium-term can offer substantial yield gains associated with the loss of liquidity.
Kelly manages a $2 billion short-term fund for the Cambridge, Mass.-based firm. The asset allocation is 40% domestic corporates, 35% ABS, 10% international corporates, 7% agency debentures, 5% agency passthrough and CMOs and 3% CMBS.
The fund's duration is 1.75 year, against 1.60 years for the benchmark Merrill Lynch One- to Three-Year Treasury index.