U.S. Bancorp Asset Management will reduce its corporate credit portfolio by up to 5% if interest rates continue to rise and put pressure on swap spreads.Jeffrey Ebert, portfolio manager at the firm, which manages $17 billion in taxable fixed income, says wider swap spreads tend to cut into banking sector profitability, which would in turn cause spread-widening throughout the corporate bond market as other sectors readjust. As 10-year swap spreads widened to 70 basis points, U.S. Bancorp sold 10-year notes of Wells Fargo, Citigroup and other banking names, to trim its allocation by 1%. Swap spreads had tightened to 46 basis points near the market close on Aug. 8, and Ebert says they would not need to hit 70 again before the firm would recommence selling corporates. "If we saw more weakness in the mortgage market, accompanied by a rise in rates and an extension in mortgage-backed securities portfolios, that would create a selling situation," he says.
Ebert is still not sure whether to continue selling high-quality banking and finance credits, or unload higher-beta sectors such as telecom, media and cable. He says he is leaning toward selling the latter group, on the view that moderate spread-widening in high-quality names will eventually lead to sharper moves in more volatile sectors. He declines to identify specific credits in the portfolio that the firm may unload, but says that proceeds would likely go into its MBS and agency portfolios.
The Minneapolis firm is roughly neutral versus one of its main bogeys, the 4.44-year Lehman Brothers aggregate index. It allocates 38% to MBS, 30% to U.S. Treasuries and agency debentures, 26% to corporates and 6% to asset-backed securities.
