Reto Koller, portfolio manager with Winterthur Investment Management, will switch from a neutral Treasuries exposure to a barbell strategy in a couple of weeks by moving out of five- to 10-year Treasury allocation and buying into three-month and 30-year Treasuries. The move would involve 10% of the portfolio or $200 million. A barbell strategy increases protection against price depreciation along the intermediate part of the yield curve. Koller reasons that by mid-April, the Treasury curve will flatten ahead of the first Federal Reserve tightening which he anticipates will be in May following signs the economy is growing. He says that the market's anticipation of the Fed move will lead to a flatter yield curve as early as mid-April. Koller says a trigger for his barbell strategy will be when the yield differential between the long bond and the two-year Treasury decreases to 200 basis points. Last Monday, this yield differential was 211 basis points.
In order to remain duration neutral, Koller will buy
$120 million in three-month Treasuries and $80 million worth of long bonds. Those purchases will be financed evenly by the sale of five- to 10-year Treasuries, he says.
The New York-based portfolio manager allocates 52% to investment-grade corporates, 32% to Treasuries, 11% to asset-backed securities and 5% to agencies. With a 5.65-year duration, the fund is slightly shorter than its benchmark, the 5.70-year Salomon Smith Barney Treasury/Agency credit index.
