Waddell & Reed is buying euro-dollar bonds on the view that the euro is oversold and will recover in the next several months, according to portfolio manager Jim Cusser. Cusser, who manages some $800 million for the firm, bought into the recent Freddie Mac reference note euro-dollar tranche, buying some eight to $10 million worth of the 4.50% of '04 (Aaa/AAA). Financing this with a sale of shorter maturity CMOs, he reasons that the non-callable structure, coupled with the euro's current valuation of $0.93, will offer an excellent total return. He notes that although the paper has backed up slightly to yield 4.65%, with a Federal Reserve inclined to ease, the curve will steepen and paper will trade inside 4%.
Another trade Cusser recently put on was a swap out of CMOs and into the recent VA Vendee MBS offering, led by Merrill Lynch two weeks ago. He bought $56 million worth of the paper, describing the trade as yield driven, in that he picks up paper returning 6.70% and sold out of the CMOs at the 6.10% level, without extending duration. He is also looking at Diageo 6.125% put bonds of '05 (A1/A+). Although he has yet to determine the appropriate entry level, he likes the fundamentals of the global consumer brands company, as well as the convexity offered by the paper. Approximately 35% of his portfolio, or $280 million, is in puttable paper.
The Shawnee Mission, Kan., firm has an asset allocation of 50% corporates, 30% MBS, 12% Treasuries, 7% ABS, 6% cash and 5% agencies. The firm uses the Lehman Brothers aggregate as its benchmark, and at 4.50 years, is slightly short its bogeys' duration of 4.65 years.
