Ponder Investment Co. is planning to shift a portion of its $200 million portfolio out of government and agency paper and into cash, on the view that the bargain-basement nature of today's bond yields are not attractive enough given the risks. Peter Pettie, chief investment strategist in Chicago Ponder, a manager of a portfolio for non-profits, will reduce its allocation to government paper by letting bonds mature and stowing the proceeds in cash-like instruments for the long term. He expects the shift to reduce the portfolio's duration to 80% of its benchmark, from a current level of 93%. Ponder uses the Lehman Brothers Intermediate Bond Index, which has a duration of 3.17 years.
Pettie's top-down view is that strong demand for fixed-income assets, particularly from retail investors, has led to a glut of overpriced bonds. Indeed, the benchmark 10-year Treasury note's yield hit a 45-year low earlier this month. "There's no upward pressure and there won't be for some time," he says, noting that supply in the corporate bond market is expected to be limited. He expects Ponder to trim its portfolio not by sales, but by letting coupons roll off. And although he thinks there may be some room left in the overall bond market's rally, Pettie says the run is nearing the end of the cycle. "It only has value if you're not the last guy holding the lowest yield, and for us that last 25 basis points is not worth it," he says. And, he's not waiting for a slight increase in yields to put his cash to work: "we wouldn't view 3.75% for the 10-year as a buying opportunity," he says.
Pettie declines to name specific allocations; though the firm began buying investment-grade corporates earlier this year, a majority of the portfolio is in government and agency securities.
