Jeffrey Layman, director of investment services at BKD Wealth Advisors, is shifting his portfolio to lean more toward shorter end investments in the face of a flattening yield curve. Layman, who oversees a fixed income investment grade portfolio of $250 million, said he is looking to callable agencies. "In this current market, callable agencies definitely give us a defensive yield advantage, he said. "As far as call protection goes, in this upward interest rate environment, we would ideally like call protection of around a year. This is one of our more active investment areas as a lot of our new cash is going here."
Another area that Layman has been investing in lately is agency step notes. "The early coupon at the beginning of the structure was about 3 1/2 to 4%. Now I'm getting about 5% with call features. It's a real good way to get initial yield and then step up to a higher coupon. The 4% that is on the 10-year right now is the highest I've seen in as while, at least since March" he added. "Obviously every issue is different, but coupon tends to, for the most part, step up annually, and when it does, the bonds become callable on these step dates. Positioned like this, it's hard to get hurt," he said
Layman's investment grade portfolio comprises approximately 65% goverments and agencies and about 35% corporates. Although Layman has steered clear of corporates lately, he is seeing some renewed value in them. "As yields come back up they are becoming a little more attractive. It is a situation that is worth watching," he said. His benchmark is the Lehman Brothers Aggregate bond index. His duration is about five years.
Although he is strictly an investment grade bond manager, the recent problems associated with General Motors, Ford Motor and Delphi could have an impact on his investments. "The situation with the high yield auto companies could have a trickle down effect. You could see some good quality bonds with decent spreads out over Treasuries," he explained. "There will be high demand on the investment grade credits that remain, now that a few major names are in the domain of the junk investors."
