Nelson Capital Management plans to swap 5% of the firm's $120 million portfolio into corporates from agencies but wants to see better corporate earnings reports over the next few weeks before making the move, according to Palo Alto, Calif.-based portfolio manager Brian Roberts. The move is predicated on the view that the economy is improving and corporate bonds will outperform agencies.
Roberts is looking to buy high-quality corporate names in the retail or consumer sector. He likes the Target 5.50% notes of '07 (A2/A+), trading at 72 basis points over the curve last Monday, or the Procter & Gamble 5.75% of '05 (Aa3/AA-), which last Monday had a 43 basis point spread over Treasuries. Roberts says both names are attractive because they have little exposure to headline risk. He says that he likes both names because they have very little exposure to headline risk, which has affected telecom or financial companies. In addition, those two companies have well performed due to the resiliency of consumer spending, and as a result, have reduced their debt load, he says.
Roberts will finance his purchase through the sale of longer bullet agencies, in the five to 10-year maturity range, without any stated preference between Freddie Mac or Fannie Mae. The manager will lower duration by selling agencies in the long end of the curve. He sees the 10-year Treasury yield rising to 4.25% within six months from last Monday's 3.61%.
Roberts allocates 40% to corporates, 40% to agencies and 20% to Treasuries. At a duration of 3.10-years, the fund is slightly short its Lehman Brothers intermediate government-corporate 3.20-year bogey.
