Chris Mahoney, portfolio manager with J. & W. Seligman, will rotate 10% of the firm's portfolio, or $200 million, out of agencies and Treasuries and into corporates. The assumption behind this move is that corporates will outperform as the economy picks up. Mahoney adds that there is no particular indicator, or event that will trigger the move.
Mahoney plans on buying investment-grade corporates, mostly triple-B's, and exclusively cyclical names, as those will benefit the most from the anticipated recovery. He declined to specify names of future trades but says sectors such as retail, brokerage firms, railroads and pharmaceuticals are likely picks. Mahoney recently bought the newly issued Valspar Corp 6% of '07 (Baa2/BBB) at a 170 basis spread over five-year Treasuries. Last Monday, the notes traded at 163 basis points over the curve. Mahoney will group his corporate purchases in maturities ranging between four- and eight-years. He reasons that the economic recovery will cause the Federal Reserve to raise rates, but not before August, as inflation remains extremely low. While the rate hikes will cause the curve to flatten, the lack of inflation will offer a premium for bonds positioned in the belly of the curve, he says.
The purchases will be financed through the sale of approximately $140 million worth of Treasuries and $60 million worth of agencies. Mahoney reasons that Treasuries will depreciate with the recovery and that agency spreads are not as attractive as those offered by corporates.
Mahoney manages a $2 billion portfolio. He allocates 40% to corporates, 33% to agencies, 20% to Treasuries, 5.5% to mortgage-backed securities and 1.5% to asset-backed securities With a 5.33-year duration, the fund is slightly short its bogey, the 5.39-year Lehman Brothers government credit index.
