Stone Ridge Investment Partners plans to shorten duration by 2.5% if the 10-year Treasury closes with a yield at or below 5%: it would cut duration to 4.39-years from its current 4.5-year level. Last Monday, the 10-year was at 5.10%. David Killian, portfolio manager, says he would buy two- and 30-year U.S. Treasuries, selling intermediate maturity Treasuries to shorten duration. He says he has no idea whether yields will fall below 5%. He believes the Federal Reserve has mostly finished easing rates, because the most recent cut was only 25 basis points instead of the 50 many had expected.
Stone Ridge has also been buying auto paper lately, which Killian believes is oversold due to the market's still-pessimistic view of the direction of consumer spending. He has purchased Ford 77/8% notes of '10 (A2/A-), General Motors Acceptance Corporation 73/4% of '10 (A2/A), and Daimler Chrysler 7% of '11 (A3/A-). Killian says he has also been selling GMAC bonds to buy Ford, on the view that they should trade on top of each other, though he says the Ford bonds are oversold due to the company's legal troubles involving Bridgestone/Firestone. The Ford 7 7/8% notes were trading at 174 basis points over the 10-year Treasury curve last Tuesday; the GMACs were trading at 161 over.
Stone Ridge allocates 42% to corporates, 40% to mortgage-backed securities, 15% to Treasuries and 3% to asset-backed securities. The firm has $175 million under management. At a duration of 4.5 years, the Malvern, Pa., shop is slightly under its 4.6 year benchmark, the Lehman Brothers Aggregate Index.
