Missouri Valley Partners is maintaining its overweight contribution to investment-grade corporates and short maturity structure, on the view that corporate bonds are too rich to put new money to work and the bond market's extended rally is nearing its end.
Steven Jones, director of fixed-income in St. Louis, says the manager of $1 billion in taxable fixed-income is keeping its roughly 51% allocation to corporates steady, in short-term instruments such as two-year Sun Microsystems and Motorola bonds. He says spreads on these have tightened, but with the economy improving and higher interest rates almost a foregone conclusion, it would not make sense to sell these bonds now. "I think we've seen the low on the 10-year for our lifetime. You almost have to hold your nose, because rates will go up. We're getting paid to own bonds," he reasons, as to why he's staying put.
Jones says the money manager tends to own higher-beta corporate names in the triple-B range at the front of the curve. He says higher rates will hit all bonds hard, but he hopes to minimize any price damage by staying in higher-coupon securities. Missouri Valley's allocation to corporates is overweight versus the Lehman Brothers aggregate, but is underweight on a contribution-to-duration basis because the manager owns short paper. Duration itself is 3.91 years, or about 85% of the index's 4.6-year duration.
Elsewhere, mortgage pass-throughs account for 22% of the portfolio, an underweight. Jones also holds callable agencies (9%) as a mortgage substitute, given the recent prepayment volatility. Another 18% or so is in Treasuries. Jones says Missouri Valley does not hold any asset-backeds or commercial-mortgage backeds, because he prizes liquidity.
