American Express Financial Advisors, which moved aggressively into spread product earlier this year (BW, 3/19), plans to continue to add slightly where it sees select buying opportunities. Colin Lundgren, portfolio manager of $7 billion in taxable fixed-income, cites Ford Motor Company paper as an example of his overall corporate strategy. Accounts under Lundgren's management currently contain $70 million in Ford bonds, largely the 73Ž8% of '11, which were trading at about 188 basis points over treasuries--a weighting that is consistent with his benchmark, the Lehman Brothers Aggregate Index. The Ford paper has traded in a range between 170 and 220 basis points over treasuries this year, and, on the assumption that it will continue to do so, Lundgren will add another $70 million if yields climb to over 200 basis points above treasuries, after which point he would ride the spreads in to 170-175 over on the expectation that the cycle would begin again. However, a credit-specific event could cause him to alter his strategy. Most of the corporate holdings under Lundgren's management are from the top 100 issuers, though occasionally he will buy less-liquid paper if the price is right, as was the case in a recent issue by Citizens Communications. Lundgren says he expects the overall corporate market to continue to perform well as the stock market recovers.
If there is a point on the treasury curve Lundgren sees as a good play, it is the long end, because he believes inflation is not a serious risk. Lundgren says he will add about 2% of his portfolio (or $140 million) in 30-year treasuries if yields, now at 5.75%, approach 6%.
Lundgren is most optimistic of all about the mortgage-backed securities market. He recently added $30 million in Fannie Mae 30-years 6.5s, selling $20 million in 10-year U.S. treasuries, and taking $10 million in cash to fund the move. He says slight flattening in the U.S. treasury curve will not greatly harm the performance of mortgage-backed securities because higher interest rates should keep prepayments to a minimum.
Funds managed by Lundgren have 44% in MBS, 33% in corporates, 13% in U.S. treasuries, 6% in U.S. agencies, 3% in cash, and 0.5% in asset-backed. At a duration of 4.95 years, he is slightly long the 4.75 year Lehman Brothers Aggregate Index.
