Cavanaugh Capital Management is considering shortening duration by selling U.S. agency debentures and adding mortgage-backed and corporate bonds in two- to five-year maturities. Jim Dugan, portfolio manager overseeing $400 million in taxable fixed income, says the firm will seek to reduce its agency exposure by 6-8% in its $80 million core composite portfolio. The 3.9-year duration of the core composite portfolio is slightly short its bogey, the 4.32-year Lehman Brothers aggregate index. Dugan says the firm may look to bring duration down to 3.5 years. It will begin buying once 10-year Treasury yields show signs of stability. Last Monday, they were at 4.85%--representing a drop of 16 basis points in five days. Dugan says the firm is not looking for an absolute level before investing, but it will continue to wait as long as such a rate of appreciation for Treasuries persists.
Cavanaugh will favor MBS over corporates since the firm is already overweight corporates and taxable municipal bonds versus the Lehman Brothers aggregate index. The money manager will look for two- to five-year PACs and balloon mortgages backed by 15-year collateral. With regard to corporates, Cavanaugh will look for single-A or better credits with clean balance sheets. Dugan says the firm has no specific credits in mind yet.
The Baltimore firm's core composite portfolio allocates 29% to taxable municipals, 25% to MBS, 18% to agencies, 11% to corporates, 10% to Treasuries, 5% to cash and 2% to asset-backed securities.
