Marty Margolis, portfolio manager with Public Financial Management, says his firm will swap 20%, or $500 million, of its $2.5 billion portfolio, out of agency debentures into Treasuries over the next six weeks, should agency spreads remain at current levels. As an example, Margolis says both Fannie Mae and Freddie Mac two-year bonds have seen their spreads over comparable Treasury move from 45 basis points last July to 22 basis points, as of last Tuesday. Margolis adds that if the same spreads narrow by an additional 15 basis points, putting agency spreads at their tightest levels since Spring 1997, the firm will add 20%, or $500 million of its $2.5 billion portfolio, at the same time.
Margolis says he will reduce exposure to 18-month and two-year Fannie Mae or Freddie Mac debentures. The sales will concentrate on the shorter part of the curve because that is where the spreads are the tightest, he explains. He notes that he will seek to sell the Freddie paper first because he views them as richer, on a relative yield basis, than Fannies.
With the proceeds, Margolis will buy off-the run three-year Treasuries, because they remain cheap, and because they do not add too much duration. Margolis explains that the firm's policy is to maintain duration at 90% of its benchmark. With a 1.45-year duration, the fund is short of its benchmark, the Merrill Lynch one-to-three year index, which has a duration of 1.61 years.
The Harrisburg, Pa.-based firm specializes in financing public agencies for State and local Governments. With a $2.5 billion fund it allocates 60% to agencies, 20% to Treasuries, and 8% to corporates and has 12% in cash.
