Missouri Valley Partners is seeking to resume an asset reallocation from corporates to mortgage-backed securities that was interrupted by attacks on the World Trade Center. Steven Jones, portfolio manager of some $200 million, says the St. Louis shop shifted to an overweight position in MBS from a neutral position, and from overweight to neutral in corporates, just prior to Sept. 11. Jones says the fund will consider swapping a total of an additional $10 million in two- to three-year bonds of Heller Financial, which will soon be acquired by General Electric (Aaa/AAA), Banc One and Merrill Lynch into similar duration MBS paper if spreads return to pre-Sept. 11 levels.
Prior to the attacks, the Heller 7.875% notes of '03 (A3/A-) were at a spread of 55 basis points over comparable Treasuries. Last Monday the bonds were trading at 75 basis points over the curve. Banc One's 8.74% notes of '03 (A1/A-) widened from 140 basis points to 170 over Treasuries as of last Monday. Not surprisingly, given that Merrill's headquarters have been shut down since Sept. 11, that firm's bonds have seen the most widening of the three. Its 6.55% notes of '04 had ballooned from 120 to 170 over comparable Treasuries.
Missouri Valley Partners may also take profits in 30-year Treasuries should the yield curve flatten to the point where there is only 75 basis points of daylight between yields on two- and 30-year Treasuries. Missouri Valley allocates 43% to MBS, 42% to corporates, 11% to Treasuries, 2% to cash and 2% to Agencies. At a duration of 4.3- years, Missouri Valley Partners is slightly short its 4.52-year bogey, the Lehman Brothers aggregate index.
