The Los Angeles County Treasury will buy $200-300 million of Freddie Mac's two-year callable agencies in the coming months. Tony Mason, manager of the $15 billion portfolio in Los Angeles, said he runs the portfolio against the Fed Funds rate because of the county's liquidity needs. The portfolio's goal is to achieve a minimum return of 25 basis points more than the Fed Funds rate and currently has an average life of 240 days.
Mason said he will add two-year callable agencies when the two-year Treasury rate hits 2.75%. The two-year Treasury was at 2.60% on July 26 and Mason said it could hit 2.75% soon because the economy is picking up and Treasury yields are rising.
The return on these agencies should be 50-60bps more than the two-year Treasury rate, he said. He explained callable loans are more attractive in a rising rate period because loans get called enabling him to reposition the portfolio when the rate rises. "Bullets do not offer that flexibility," he noted.
These new purchases will take the portfolio's agency allocation up marginally from the current 30%. The portfolio has room for adding a maximum of $1.5 billion of Freddie Mac securities, he explained.
Mason said the county reduced its exposure to agencies from 60% to 30% in the last year because of the accounting scandals. All agency proceeds were put in corporate notes, certificates of deposit and other short-term assets, he said. However, the new purchases cannot take the agency allocation up to its original level or anywhere close to it, he said.
The portfolio is 15% in Treasuries, 30% in agencies and the rest in commercial paper, certificates of deposit and corporate notes.
