The Texas Permanent School Fund is looking to shift some $170 million out of collateralized mortgage obligations and commercial mortgage-backed securities and into corporates and callable agency debentures. Carlos Veintemillas, portfolio manager of $8.5 billion in taxable fixed-income, says CMOs and CMBS have had a great run, but he believes the economy will improve by year-end, which should cause corporates to outperform CMOs and CMBS. He also argues that corporates will get a boost if dividend taxes are eliminated, because it will encourage companies to look more favorably on issuing equity and cut back on debt issuance. As for callable agencies, Veintemillas says they offer more yield than bulleted agencies, and tend to outperform bullets as interest rates rise. Veintemillas says he will make the trades as the securities he is looking for become available.
Household International is among the corporate credits he has been buying on the view that it trades at a substantial discount to its future parent, HSBC. Household's 6.75% notes of '12 (A2/A-) were trading 160 basis points over 10-year Treasuries last Wednesday, while the HSBC 5.25% notes of '12 (A1/A) were 100 basis points over the 10-year. Veintemillas says the fund may continue to add exposure to the name when he sees the right bid.
Telecommunications is another sector Veintemillas favors. He argues that the sector has cheapened due to credit concerns and the weak economy, but some companies have built their infrastructure and will start reducing cap-ex and become cash flow positive. AT&T Wireless is one of the credits where he sees value. The 8.125% notes of '12 (Baa2/BBB) were trading at 384 basis points over Treasuries last Thursday. Veintemillas also likes the cable sector, particularly Comcast Corp. Comcast's 7.125% notes of '13 (Baa3/BBB) were bid at 211 over the curve.
At a duration of 3.93 years, the Austin-based fund is slightly long its bogey, the 3.79-year Lehman Brothers aggregate index. It allocates 41% to MBS, 24% to corporates, 22% to Treasuries and 13% to agencies.
