The United Nations Federal Credit Union is looking to add $25-50 million in range notes--structured notes that are a subclass of agency debentures. Christopher Sullivan, cio, overseeing $875 million in taxable fixed-income, says the securities are a way to add considerable incremental yield for high-grade investors who don't like the mortgage market. The bonds, which are callable on a quarterly basis, yield 7-7.25% for a 15-year maturity, provided that three month LIBOR remains within the 0-7% range. The credit union recently bought $20 million in range notes, selling Treasuries and agency bullets of roughly five years in duration. Sullivan likes to pick up range notes in the secondary market, and is waiting for further issuance before buying more. He sees strong demand driving continued issuance of the securities.
To raise money for additional purchases of range notes, the credit union will likely sell Treasuries of roughly two-year maturities. "That part of the curve has run pretty far pretty fast, and if equities stabilize and we see continued selling [of two-year notes] as the war premium is extracted, I'm not at all constructive on it," Sullivan says.
As a defensive play against the potential for rising interest rates, the credit union has been adding bank floating rate notes with maturities of two to three years, which are priced off of LIBOR. Sullivan expects short rates to move up over the next two to three years, with the Federal Reserve raising rates possibly toward the end of the year. The credit union has recently added $15-20 million in floaters, and would add another $5-10 million as they become available. It would use cash flows from interest payments and maturing bonds to buy the floaters, Sullivan says.
At a duration of 1.5 years, the New York-based credit union is short its roughly 1.7-year bogey--a customized index based loosely on the Lehman Brothers aggregate. It allocates 30% to mortgages, 25% to agencies, 20% to corporates, 15% to Treasuries and 10% to taxable municipal bonds.
