Allied Investment Advisors, a Baltimore, Md. money manager, will allocate some 5-10%, or $7-14 million, to two- and three-year corporate floaters. Wilmer Smith, a portfolio manager who oversees a $140 mutual fund for the firm, says he is waiting for 10-year Treasury yields to retouch 4.5% before making the move, which he expects to happen once continued poor employment data causes a further decline in consumer confidence. He particularly likes Sallie Mae asset-backed student loans, which will reset at higher yields if, as he expects, the government increases T-bill issuance. Allied would sell two-, five-, and 10-year Treasuries to finance the move.
The firm recently added $5 million in 10-year subordinated Freddie Mac agency notes and $10 million in one- and three-year tranches of a recent asset-backed issue by AutoNation. It sold five- and 10-year Treasury bonds to finance the transactions. Smith says the trades were made to pick up additional yield. He says the subordinated agency paper traded between 22 and 25 basis points wider than the benchmark 10-year agency issue on Friday, Nov. 16. It traded just under 90 basis points wide of the 10-year Treasuries the firm sold. As for the AutoNation deal, Smith says it came at a premium to similar past deals, as ABS auto spreads have widened due to recent heavy supply. Smith says some of the AutoNation deal was distributed to other funds under the Allied umbrella. In total, the firm manages some $7 billion in taxable fixed-income.
At a duration of 3.86 years, the fund is slightly long its 3.74-year bogey, the Lehman Brothers intermediate/government corporate index. It allocates 47% to corporates, 31% to Treasuries, 10% to ABS, 9% to agencies and has 3% in cash.
