Linda Patterson, portfolio manager with Patterson & Associates in Austin, TX, plans to increase the firm's allocation to agencies to 80% of its portfolio, or by about $35 million, providing that agency spreads versus comparable treasuries widen by an additional five to 10 basis points.
Patterson believes that treasuries are over-priced at present compared to agencies. If the agency spread versus treasuries were to come in by 10 basis points, then maybe treasuries would be attractive again, due to their additional credit safety, she says. But, Patterson doubts this scenario will occur any time soon, since the spreads have held steady for the past 10 months. With new supply of Fannie Mae and Freddie Mac debentures set to come to market this summer, and the likelihood that the agencies may also increase yields to entice investors to buy more agency paper, the spreads over treasuries are likely to widen more, predicts Patterson. An example of a recent agency trade is Patterson's purchase of some Fannie one-year discount agency debt maturing in '02, with a 36 basis points spread over the one-year treasury bill.
Patterson manages a $700 million portfolio with the following asset allocation: 75% agencies, 20% commercial paper and 5% treasuries. The firm does not use a specific benchmark, except the one-year treasury. Overall, the portfolio duration is slightly shorter than that of the one-year treasury note because of the remaining inversion of the yield curve.
