ABN AMRO Asset Management is looking to sell a total of $100-150 million two-year and five-year U.S. Treasuries to buy agency debentures of similar duration in a bid to add yield. Tom Marthaler, director of the firm's $19 billion in taxable fixed-income, says he is looking for two-year agencies to widen to between 35 and 40 basis points over Treasuries before making the trade. At the start of trading last week, they were 32 basis points over the curve. Marthaler says five-year agencies would look attractive at 55 basis points over Treasuries. They were 10 basis points tighter at the start of last week's trading. Marthaler says agencies tend to widen in relation to swap and Treasury spreads as the Treasury curve flattens, which he argues will happen over the next 12 months.
One recent trade the firm made in anticipation of a flattening of the Treasury curve was to shorten duration by 5%, selling $250 million of five- to 10-year Treasuries, and buying one- to two-year notes. The shift gives ABN AMRO a barbell position, which would benefit from a flattening of the curve marked chiefly by a rising front end.
At a modified adjusted duration of 3.6 years, the Chicago-based money manager is about 10% short one of its main bogeys, the 3.97-year Lehman Brothers aggregate index. It allocates 40% to credit, 25% to mortgage-backed securities, 15% to Treasuries, 15% to cash and 5% to agencies.
