National City Investment Management, a Cleveland money manager with some $4 billion in taxable fixed-income under management, is looking to shorten its duration to a neutral position. Andy Harding, portfolio manager, says he believes Treasuries are oversold, and he does not expect the economy to improve until the middle to the end of the second quarter. As a result, the firm has extended duration in recent weeks to 10% long to its various benchmarks across 95 separate portfolios. Portfolios managed against the 4.5-year Lehman Brothers aggregate index, for example, have a duration of 4.7 to 4.8 years. Harding says the firm will move to a neutral duration once the yield on 10-year Treasuries reaches 4.60%, which he believes could happen in a month, if not sooner, given the market's volatility. Last Tuesday the 10-year Treasury was yielding 5.06%.
As part of its duration play, National City moved from a 4-5% underweight in mortgage-backed securities to a neutral position versus the Lehman aggregate index. Harding says he would reverse the trade if he sees two-year Treasury notes approaching a 2.25% yield and 10-year notes going to 4.30%, which, as of last week, he did not. National City buys 30-year, current-coupon pass-throughs, because they are the most liquid, says Harding. In its corporate allocation, the firm has added strong single-A credits, such as Alcoa. He declines to say why the firm bought Alcoa, or which Alcoa bonds it bought.
Though allocations vary widely across different portfolios, National City allocates roughly 25% to corporates, 25% to MBS, 20% to Treasuries, 10% to CMBS, 10% to ABS and 10% to agencies.
