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| Bill Larkin |
Cabot Money Management is buying callable agencies to pick up extra yield over comparable bullets. William Larkin, Jr., portfolio manager of $250-300 million in taxable fixed income from Salem, Mass., said he likes these bonds now as rising interest rates make it less likely such bonds will be called away. He declined to quantify how much he would add in this sector. Larkin recently bought a Freddie Mac 3 3/4% due August '12 with a one-time call and step-up that resets the coupon to 6% if the bond is not called. The bond yields 98 basis points over Treasuries, versus comparable bullets yielding only 30bps over Treasuries. He buys agencies in the five- to 10-year sector, but keeps his purchases of Fannie Mae and Freddie Mac to shorter maturities than paper from the Federal Home Loan Banks and Federal Farm Credit Banks due to increased risk to the government sponsored-enterprises from proposed legislation, he said.
Because Larkin is limited to buying names A-rated and above, he prefers solid investment-grade names such as Caterpillar, Coca-Cola and Dow Chemicals. He said he is finding the best deals in paper two- to five-years in maturity.
Larkin's portfolio is composed of 40.7% in corporates, 31% in agencies, 12.8% in Treasuries, 9% in ultrashort mutual funds, 2.6% in auction-rate preferreds, 2% in CDs and 1% in cash. His benchmark is the Merrill Lynch U.S. Domestic Master, A-rated and above.
