George Schupp, portfolio manager withU.S. Bank Asset Management, formerly known asMississippi Valley Advisors, says he will rotate 5% of the firm's $2 billion portfolio, or $100 million, from Treasuries into corporates when single-A rated corporate bonds widen by 50 basis points. Single-A bonds were trading at an average of 150 basis points off the curve last Tuesday. He says he is uncertain as to when the spread widening may happen. He argues that high-quality corporate bond spreads are tight due to a particularly difficult corporate environment given the widespread regulatory and ratings problems within the sector.
Schupp declined to indicate which bonds he would pick for his corporate purchases, but says he likes the 10-year maturities as this part of the curve offers liquidity. He says he favors bank bonds because if the curve flattens their spreads would widen, citing the names of Citigroup, Bank of America or Wells Fargo & Co. He also believes that some names within the food and beverage sector may see their spreads widen if the recovery is slower than expected, as the sector is cyclical.
He says he would use Treasuries to finance his corporate purchases. He argues that holding Treasuries, despite low yields, makes a lot of sense now because the corporate sector is going through so many problems. But as soon as corporate bonds start to recover, liquidating Treasuries would be the logical strategy as it would allow him to finance his acquisitions without giving up much yield.
Schupp manages a $2 billion portfolio out of St Louis, Mo. The fund is allocated 48% to corporates, 30% to Treasuries, 13% to agencies, 5% to mortgage-backed securities and 4% to asset-backed securities. With a 5.40-year duration, the fund is neutral its benchmark, the Lehman Brothers government credit index.
