The Philadelphia Trust Co. may buy up to $60 million in 10-year and longer paper, with the majority in Treasuries and agencies, should 10-year rates back up to 4.25%. The move would be a short-term strategy and the buyer would look to take profits if and when the 10-year retracts to the 4% level, according to Michael Crofton, president and ceo. Crofton overseas about $400 million in taxable fixed income from Philadelphia. The 10-year was at 4.08% on June 13.
Crofton will roughly double his allocation to paper 10-years and out from 15-30% in case of a rate back-up. The manager believes 10-year rates could rise to his target level in the third quarter due to renewed uncertainty over the economy's direction, a possible disruption in the real estate market and growing inflation. Meanwhile, he keeps duration short with 85% of his portfolio in paper five years and shorter.
Crofton has been a steady buyer of callable agency debt five years and in with a one-year to 18-month call. He likes these structures because in a stable rate environment the paper is less likely to be called away. He most recently bought callables from the Federal Home Loan Banks, but also owns such debt from Fannie Mae, Freddie Mac and Farmer Mac.
Within corporates, Crofton sticks to double-A paper or better. He said he has not purchased any names recently, preferring instead to take credit risk in equities.
Crofton's benchmark is the Lehman Brothers Intermediate Government/Credit Index. His portfolio is composed of 85% in Treasuries and agencies and 15% in corporates.
