Mike Materasso, portfolio manager with Fiduciary Trust Co. International, says he will rotate 5% of one of the firm's $3 billion funds, or $150 million, from Treasuries and agencies into sovereign bonds over the next three weeks. He reasons that sovereigns have more room for appreciation than in the U.S. as prospect for future growth in Canada, Australia or Germany remains lower. The firm will stay underweight on the five-year part of the U.S. curve, because of the Treasury's announcement that it may issue five-year Treasuries on a monthly basis, a move that would inflate supply and depreciate prices.
Materasso will buy one-year Canadian and Australian government bonds as well as 10-year German bunds, selling comparable maturity U.S. Treasuries to finance those purchases. In both its Australian and Canadian acquisitions, the firm remains on the short-end of the curve, and is taking currency exposure while looking for better yields, says Materasso. Both currencies have rallied over the past four weeks, he says.
In Canada, the Government has raised rates so that the short-end of the curve offers higher yields than in the U.S. The firm will buy 10-year German bunds as the interest rate differential between the U.S. and Germany is wide enough to suggest that 10-year German government bonds will rally relative to the U.S. 10-year Treasury, says Materasso.
Materasso manages a $3 billion core plus fund out of New York. He allocates 40% to mortgage-backed securities, 30% to investment-grade corporates, 15% to Treasuries, 5% to agencies, 5% to non-dollar-denominated sovereign, 2% to asset-backed securities, 2% to commercial mortgage-backed securities and 1% to high-yield corporates. With a 4.25-year duration, the fund is 5% short its 4.50-year index, the Lehman Brothers aggregate index.
