Northern Capital Trust has drastically shortened its duration toward its benchmark, the Lehman Brothers Government corporate index, and will remain short as long as the spread between Treasuries and underlying inflation remains compressed, says Greg Sweeney, portfolio manager with the Fargo, N.D.-based investment management firm. Meanwhile, Northern Capital is buying corporate bonds 20% shorter than the benchmark.
Sweeney indicates that the fund's average duration is now at 3.90 years, against 5.10 years for the benchmark mentioned above. He is going to wait until the currently yielding 5.30% 10-year Treasury reaches a target yield of 6.25% before neutralizing his duration or going longer. Right now, he says, his real rate of return on the 10-year range--based on a 3.30% inflation rate--is only 2% and is not enough. Sweeney's overall strategy is to stay on the short end (or safe side) of the curve in order to limit portfolio erosion. He predicts the yield on the long bond will increase, due to the fact that spreads are already compressed and that the easing policy will lead to a rising inflation.
In order to implement this duration strategy, Sweeney has recently bought shorter corporate products with money from new accounts. He has concentrated on the three-and-a-half to four-year range for those corporate bonds, a duration 20% shorter than the 5-year average benchmark corporate duration. Sweeney bought Tyco International Group 6.375% '03 (Baa1/A), First Union National 7.80% '06 (A1/A) and Citicorp 6.375% '04 (Aa3/A).
Sweeney manages a $300 million taxable fixed-income portfolio with an asset allocation of 60% corporates, 30% Treasuries and 10% agencies.
