Bailard, Biehl & Kaiser plans to reduce the portfolio's duration by selling some $10-$15 million of 10- and 30-year govvies in order to add five-year Treasury notes. At the same time, the Foster City, Calif., firm will seek to add corporate exposure by up to $10 million. Portfolio managerEric Leve says he is making the move because he expects 30-year corporates to outperform 30-year Treasuries due to additional government defense spending, industry bailouts and rebuilding, and decreased Treasury buybacks. Leve manages just over $100 million in taxable bonds, though the firm manages $250 million, and he says advisers of private accounts at the firm often mimic his trades.
In shuffling corporate holdings, Leve says he will look at dollar-denominated issues from France Telecom (A3/A-), because they contain generous step-up provisions, which increase the coupon paid to investors after a downgrade. Leve suggests that recent data from Moody's Investors Service forecasting an increase in the corporate default rate will also lead to an increase in downgrades among investment-grade credits. He says he has not yet determined which issues he would buy.
Leve is also considering swapping out of Wal-Mart 6.875% notes of '09 (Aa2/AA) to buy Target 7%s of '30 (A2/A+) in order to pick up some yield. The Target notes traded at 145 basis point over comparable Treasuries last week, while the Wal-Mart notes were at 110 over the curve.
Bailard, Biehl & Kaiser allocates 35% of assets to Treasuries, 26% to corporates, 2% to high-yield, 18% to agencies and 19% to non-U.S. dollar bonds hedged in dollars. The firm's duration is 5.26 years, slightly short of its principal benchmark, the 5.34-year Merrill Lynch Corporate Government Master Index.
