Advantus Capital Management has been swapping into investment-grade corporates, and out of Treasuries and pass-throughs, on the view that the market has reached the trough of the credit deterioration cycle, according to portfolio manager Wayne Schmidt.
An example of this is seen by his swapping out of '04 Government of Canada bonds (AA) at 70 basis points off U.S. Treasuries and into the new Vulcan Materials 6.40% notes of '06 (A1/A+) at 155 basis points off the five-year. Schmidt is not worried about the slight duration extension given the fact that he is looking for a bond-market rally into the Federal Reserve's easing cycle, and he is confident the slight trade off in bond rating is more than compensated for by the yield pick up.
Schmidt has also purchased the newly issued J.P. Morgan Chase 6 3Ž4% subordinated notes of '11 (A1/A+) at 153 basis points off the 10-year, and financed the trade by selling the 6.60% Proctor Gamble notes of '04 (AA) at 70 basis points over the curve. Another attractive corporate swap was his sale of Province of Ontario bonds of '04 at 80 basis points off the five-year, and into the newly issued 6.75% Progress Energy senior notes of '06 (Baa1/BBB) at 180 over the curve. In the mortgage arena, an area of opportunity to Schmidt has been CMBS, where he and his team have been rotating into AAA- and AA properties, and have been swapping out of TBA pass-throughs. Along parallel lines, Schmidt has been an active buyer of CMO's and other structured mortgage product, which allows the St. Paul-based fund to avoid prepayment risk.
The $1 billion in assets fund has an asset allocation of 40% MBS (which also includes mortgage ABS and CMBS), 40% investment-grade corporates, 10% agencies and 10% Treasuries. The fund uses the Lehman Brothers aggregate as its benchmark, and at 4.88 years, is slightly long the bogey's duration of 4.69 years.
