Financial Counselors swapped 3% of its portfolio, or $36 million, from Treasuries into high-grade corporates last week, says Peter Greig, portfolio manager for the Kansas City-based investment firm. Concerned that the Federal Reserve is nearing the end of its easing cycle, Greig says the move was designed to preserve the portfolio's principal while picking up some incremental yield. He adds that if corporate spreads widen by an additional 15 basis points, he will swap an additional 3-6% of the portfolio, or between $36 and $72 million.
Greig says the 3% move last week allowed the firm to shorten its duration by 10% the firm bought two-year maturities or under in the corporate bond sector, while selling six- to 10-year Treasuries.
Greig says the firm purchased Walt Disney Co. 3.9% notes of '03 (A2/A) at a 130 basis point yield over the two-year Treasury. As of last Tuesday, the bond was at 95 basis points over the comparable Treasury. The acquisition was financed by the sale of six- to 10-year Treasury notes.
Financial Counselors anticipates the Fed will cut rates by 50 basis points this week, which is likely to lead to a widening of corporate spreads because corporate yields, especially on the short end, will lag the short Treasury yield decline. Greig concedes that by keeping corporate purchases on the short end and selling long-term Treasuries, he is giving up yield, considering the steepness of the current Treasury curve where one can gain 100 basis points by simply moving from a two-year to a five-year Treasury.
Greig manages a $1.2 billion portfolio which has an asset allocation of 47% corporates, 35% Treasuries, 12% agencies and 6% collateralized mortgage obligations. With a 4.60-year duration, the portfolio is 20% shorter than its benchmark, the Lehman Brothers government/credit index, which has a duration of 5.56-years.
