David Killian, portfolio manager of $175 million in taxable fixed income at Stone Ridge Investments Partners, has been looking to "cut back significantly" on the firm's holdings of Tyco International 6.75% notes of '11 (Baa2/BBB). As of May 10, Tyco represented 5%, or roughly $4 million, of the firm's holdings. Killian says he believes Tyco's bonds will rise substantially in price once the firm completes its planned IPO of CIT Group. The paper was trading at 84 last Monday, and Killian says he hopes to be able to sell it in the mid-90s.
More imminently, Killian is looking to unload the firm's roughly $1.5 million in Qwest Communications' 6.25% notes of '05 (Baa3/BBB-), as the bonds have rallied of late in response to its efforts to reduce debt. Stone Ridge plans to park both the proceeds from the Qwest and Tyco bonds in Treasuries of comparable maturities until it decides what to do next.
Some of Stone Ridge's recent trades include selling $2 million of United Technologies 6.35% notes of '11 (A2/A+) at 92 over Treasuries. It gained additional yield by swapping into AOL Time Warner's recent issue, the 6.75% notes of '11 (Baa1/BB+), which was at 270 over the curve at the time of the purchase and had narrowed some 26 basis points by last Monday. Killian believes the issue will eventually trade flat to the Disney 6.375% notes of '12 (A3/A-) and Viacom's 8.625% notes of '12 (A3/A-), which were bid at 146 and 164 over the curve, respectively.
The Malvern, Pa., firm allocates 50% to corporates, 42% to mortgage-backed securities, 7% to Treasuries and 1% to asset-backed securities. At a duration of four years, it is 90% its bogey, the 4.5-year Lehman Brothers aggregate index.
