Taplin, Canida & Habacht is buying lower-quality investment-grade corporates which it believes are set for a big rally now that a recession no longer appears imminent and the Federal Reserve is in an easing mode. William Canida, a partner who helps oversee $4 billion in taxable-fixed income, says the corporates that were most susceptible to an economic downturn, such as BBB rated credits and autos and other cyclical paper, will benefit most as the economy starts moving again.
He expects the $40 million of 30-year paper he bought in DaimlerChrysler's issuance last month to tighten from about 300 basis points over Treasuries, which he considers "junk-bond type of yields," into the high 100s. Automakers appear to have reversed the sharp slowdown seen in production late last year, says Canida, and improving retail sales figures indicate that the economy is picking up steam. He says he will continue to add corporates until spreads return to historical levels.
Canida has been financing the purchases by selling longer-maturity Treasuries, along with corporates, including finance paper, with maturities of five years or less, to leverage his corporate bet on the long end that rates will head lower. Overall, the Miami-based firm's portfolio consists of roughly 60% corporates, 30% MBS and 10% Treasuries. Duration is 5-10% long the 4.53-year Lehman Brothers Aggregate Bond Index, one of the portfolio's main benchmarks.
