Piedmont Capital Management will swap 10% of its portfolio from agencies into high-grade corporates over the next few months, on the view that when interest rates finally come down--which for long-term rates has yet to happen-- corporate spreads will tighten. The move from government into high-grade corporates is designed to maximize yield without sacrificing too much liquidity, says Walter Campbell, president and portfolio manager of the firm, located in Hilton Head, SC.
Campbell says that, since the beginning of the year, the firm has already reduced the agency allocation by 10% in order to increase corporates. This swap is also a diversification move, aimed at reducing the overweight agency position. The move is now half way through its term with an additional 10% reallocation to come. As an example, Campbell recently bought CIT Group 5.91% '05 (A2/A+) at 97.37. As of last Monday, CIT Group was trading at 99.16. Campbell says his firm favors the financial or utilities sectors because interest rates are starting to move back up, albeit slowly. He mentions the firms' recent purchase of Alabama Power 6.37% of '18 (Aaa/AAA) at 92. The bonds were trading at 91.76 last Monday. Campbell notes that the flat trading range is due to the tendency of long-term interest rate to remain high. He adds that, hopefully, the spread on this bond will begin to tighten as soon as the rates come down.
With $200 million, the fund is invested 80% in agencies (debentures) and 20% in corporates. With a nine-year duration, the portfolio is shorter than its index, the Lehman Brothers long Government credit index, whose duration is 10.35 years.
