Meridian Investment Managers plans to add up to $15 million in callable agencies, with an aim to pick up income as interest rates are expected to rise over the next six to 12 months. Pat Moon , portfolio manager of $100 million in taxable fixed income in Little Rock, Ark., says the firm has recently used cash to buy callable agencies. It currently allocates 15% to callable agencies and may as much as double that exposure. The move will be financed with new cash and by reducing the 30% allocation to Treasuries to as low as 20%.
The firm recently added Federal Home Loan Bank 's 4.5% notes of '09, callable in '04. Moon sees the callable bonds as producing more income than buying a straight government bond because of the expectation of rising interest rates. The callable bonds won't fall as much because they have short calls on them, giving downside protection in a rising interest rate environment, he explains.
Meridian allocates 50% to investment-grade corporate bonds and does not anticipate changing this level as it's currently overweight compared to one of its benchmarks, the Lehman Brothers Government Credit Intermediate Index. The firm had been emphasizing corporates over the past year because of wider spreads and a weaker economy. Moon says Meridian anticipated that "both of those things would fix themselves over time and they have," pointing to the improving economy and narrow bond spreads. The fund's average duration is 3.3 years, short the benchmark's four-year duration.
