David Killian, portfolio manager at Stone Ridge Investment Partners, is looking to put on a Treasury barbell for 5-10% of the firm's portfolio in anticipation of a flattening of the curve. He says his barbell strategy will be used to reduce duration from its current 3.5-years to three-years. He will sell the intermediate portion of the Treasury curve, or Treasuries with five- to 10-year maturities. With the proceeds, he will invest in short-term Treasuries, under five-years as well as those with more than 20-year maturities. The rationale, as for any barbell strategy, is to avoid the belly of the curve, likely to depreciate the most once the curve flattens.
There is no trigger for this move other than the recovery of the equity market, which Killian says is likely to take place as a result of the recent anti-corruption regulations adopted by Congress. In particular, he anticipates Wednesday's new deadline forcing ceo's to submit sworn statements on the accuracy of their financial reports to be particularly effective. Once stock prices stop declining, he says, the Federal Reserve will raise rates. Another reason for the Fed to tighten, he adds, is because rates are at historically low levels and are not sustainable over the long run without producing inflation. He sees the Fed tightening as early as year-end.
The Malvern, Pa.-based investment firm is shorter than its benchmark, the 4.30-year Lehman Brothers aggregate index. Killian allocates 45% to corporates, 30% to mortgage-backed securities, 20% to Treasuries and 5% to asset-backed securities.
