Chelsea Management Co. is looking to swap out of $30-$50 million in U.S. agency debentures with maturities of over 10 years that are callable in two- to three-years, in order to purchase similar-yielding agencies with maturities of less than 10 years. Tom Techentin, portfolio manager of $375 million in taxable fixed-income, says what he believes is a rising interest rate environment diminishes the value of the longer duration paper. Chelsea will look to swap bonds of a wide variety of agencies, but some examples include Federal Home Loan Bank 6.75% debentures of '16 and 6.5% debentures of '16. The firm will also look to sell Federal National Mortgage Association 6.37% debentures of '14, says Techentin.
The prospect of rising rates also lowers the chances that the notes will be called, Techentin believes. He sees interest rates rising steadily by some 100-150 basis points by year-end and expects to make the trade when he finds agencies under 10 years with the yields he is getting from the longer maturity paper--either from new issuance or in the secondary market. The firm is not contemplating any other trades over the next several weeks.
Most clients of the Los Angeles-based firm use the Merrill Lynch five- to seven-year government index as a benchmark, which has a duration of roughly 5.5 years. Chelsea is currently longer, at 6.1 years. It allocates approximately 50% of its assets to U.S. agencies, 35% to corporates, and 15% to U.S. Treasuries.
