On the view that the Federal Reserve will consider at least another 25 basis points worth of rate reductions, C.S. McKee & Co. will put in place a barbell strategy by moving 10% of the portfolio from intermediate to long-end positions. Bryan Johanson, portfolio manager, is seeking to capture the drop in rates and also plans on swapping out of his TIPS into treasuries.
Johanson thinks the market is over-reacting to Fed cuts, and that the economy has yet to recover from the lay-offs and sharp losses on the stock market. He does not anticipate any recovery before the beginning of the fourth quarter, which is when he anticipates the Fed will indicate a more neutral bias.
Simultaneously, Johanson will also implement an asset rotation. He plans to sell approximately $100 million of TIPS and corporate bonds, both in the five- to 10-year range, and replace them with a combination of 30-year treasuries and cash. Again, the move will only take place after the manager perceives the economy is recovering and the Fed is done with its easing. Johanson believes TIPS will become richer because the Fed is so preoccupied with the economy that it is willing to tolerate more inflation, which adds to the value of TIPS. Also, rumors that the Treasury might cease issuance of TIPS have also lent some technical support to the sector. The manager declined to specify what would be the respective proportion of TIPS and corporates he is willing to liquidate, or the names or sectors he favored.
Johanson manages a $800 million portfolio whose asset allocation is 34% MBS (strictly pass-through), 30% corporates, 12% treasuries, 10%TIPS, 6% closed-end funds, 5% ABS, 2% CMBS and 1% cash. With a duration of 5.05 years, the fund is slightly longer than its index, the Lehman Brothers aggregate, whose duration is 4.80 years.
