Mitchell Capital Management swapped out of some treasuries two weeks ago by adding agencies and corporate bonds. The firm's treasuries allocation was cut by 8%, because government bonds have been bid up too much in value, says Ken Green, portfolio manager in Kansas City, Mo. However, he is comfortable with his current treasury allocation and does not plan to decrease it further.
Green has been watching the spread of agencies debentures over treasuries since it reached 100 basis points and got interested at 115 basis points. He sold 3% of his seven-year treasury notes in order to buy a seven-year non-callable three-year agency at a spread of 126 basis points. He notes that over the last month, treasuries have really become richer. His seven-year non-callable three-year agency recent purchase has a one-day callable feature, explains Green. If after three year, the bond is not called during that call date, it turns into a four-year non-callable paper. Green says that he likes those one-day callable agencies versus the continuously callable ones and that they account for half of his agency allocation because they offer protection while trading cheaper than a straight bullet.
One of Green's most recent corporate trades consisted of buying the 5. 375% IBM Corp. (A1/A+) notes of '09 at a 6.14% yield-to-maturity and selling the 5.5% treasury note of '09 at a 4.98% yield, pocketing a 116 basis points spread difference. Another transaction was the acquisition of the 6.375% Jersey Central Power & Light (Aaa/AAA) of '03, bought at a 5.74% yield and the selling of the 5.5% treasury note of '03 at a 4.33% yield, totaling a gain of 141 basis points. Green says the firm only invests in investment grade corporate vehicles with a two to 12-year maturity range.
Green says his firm's does not allow for a treasury allocation below a 40% floor.
Green manages a $100 million portfolio of taxable fixed-income products whose asset allocation is 46% treasuries, 29% corporates and 25% agencies. With a 4.10 year duration, his portfolio is longer its benchmark, the Merrill Lynch U.S. corporate and Government index one to 10-year, whose duration is 3.62 year.
