Carlos Veintemillas, portfolio manager with Texas Permanent School Fund, will rotate $225 million, or 3% of the firm's portfolio, from Treasuries into agencies, in order to pick up additional yield, bring his debenture allocation more in line with the index and reduce duration. He says the move will be triggered once 10-year agency bonds--which last Monday traded at a spread in the low 50's over the curve--widen by 20 basis points to a 70 basis point spread. By doing so, Veintemillas also wants to bring his agency allocation from 7% to 10%, closer to the 12% weighting of the Lehman Brothers aggragate index.
Veintemillas will look into buying Fannie Mae or Freddie Mac callable agency paper in the anticipation of the upcoming Federal Reserve tightening move, because callable paper performs better when interest rates rise. He will look at 20-year term agency paper with a seven-year call feature, the latter allowing him to reduce the duration. Overall, he wants to bring the fund's duration to a level 5% to 10% longer than the index, instead of 20% longer, as it was last week. He says the fund's duration will always be longer than the index, because the firm invests in income-generating products and has to go to the long-end of the curve in order to get the spread. Veintemillas says he will finance those purchases through the sale of long-term Treasuries.
Veintemillas manages a $7.5 billion portfolio out of Austin, Texas. He allocates 42% to mortgage-backed securities, 28% to Treasuries, 23% to corporates and 7% to agencies. The portfolio's duration, at 5.42-years, is longer than the 4.47-year duration of the index.
