Debbie Cervantes, portfolio manager at Patterson & Associates, says her firm will add agency notes and Treasuries to its portfolio, using $85 million in cash or 10% of the total fund to finance the purchases. The move will be made as soon as the stock market and the economy recover. Two likely indications that the economy is recovering, she says, would be a stabilization of the unemployment rate and some market anticipation that the Federal Reserve will shift to a tightening bias. She declined to predict when she sees the market evolving in that direction. She says that the firm has kept the overall portfolio duration short, at six months. Because, with rates at an all-time low, there is more yield pickup on the shorter-end of the curve and no real incentive to give up liquidity. As an example, six-month commercial paper, which last Monday yielded 1.80%, offers 25 basis points additional spread over Treasuries than comparable agency notes. This is due partly to the fact that the yield curve is inverted, which diminishes the incentive of extending duration, she notes. She reasons that once the Fed tightens, the yield curve will take a positive slope, making the purchase of one- to two-year agency notes and Treasuries more affordable.
Cervantes will look into buying one- to two-year agency discount notes from Fannie Mae, Freddie Mac or Ginnie Mae, providing she can get adequately compensated if spreads over Treasuries on those securities widen by 20-25 basis points. She would be buying both bullet and callable agencies, based on the structures and spreads and also depending on client requirements. In addition, she would be adding Treasuries from one-to two-years, as those will have reached a more affordable price at that point.
Cervantes manages a $850 million portfolio out of Austin, Texas. She allocates 40% to agencies, 35% to money-market funds and 25% to Treasuries. The firm does not use a specific benchmark, except the one-year Treasury.
