Lisa Black, portfolio manager at TIAA-CREF, says she will rotate 3% of the $365 million Bond Plus portfolio she manages, or $11 million, from Treasuries into corporates, as new corporate bond issues that offer spreads typically five to 10 basis points wider than outstanding debt come to market. In addition, Black expects corporate spreads to continue to tighten as the economy begins to recover. She says there is no trigger for this move.
Black declined to name future corporate purchases. But, she says the firm will add to media and telecom bonds because those belong to a sector that lagged the corporate rally last November and should trade tighter this year. An example of a recent new issue purchase is the Comcast Corp. 6.50% notes of '15 (Baa3/BBB) bought at 252 basis points over the 10-year Treasury. Last Monday, the notes yielded 241 basis points off the curve. She bought this bond because of the attractive new issue concession. In the same sector, but on the secondary market, the firm recently bought the AOL Time Warner 6.87% notes of '12 (Baa1/BBB+) at 203 basis points over the 10-year Treasury. Last Monday, the notes were trading at 186 basis points off the curve. Black says the bonds tightened 10 to 15 basis points after Steve Case, the company's chairman and ceo, announced his resignation. She also bought the AT&T Wireless 8.12% secondary notes of '12 (Baa2/BBB) at 375 basis points over the 10-year Treasury. Last Monday, the bonds yielded 306 over Treasuries.
Black will finance the purchase through the sale of Treasuries. She says that although Treasuries have recently declined in price, government bonds could decline further once the economy recovers and the uncertainty over a war with Iraq is lifted.
Black allocates 32% to residential mortgage-backed securities, 26% to corporates, 20% to Treasuries, 15% to TIPS, 3% to asset-backed securities, 2% to commercial mortgage-backed securities, 1% to agencies and 1% to cash. With a 4.15-year duration, the fund is slightly longer than its benchmark, the 4.0-year Lehman Brothers aggregate index.
