The Evangelical Lutheran Church pension board has been buying select corporates, as well as a relatively new type of insurance paper--general investment contract backed bonds--on the view that the glut of recent corporate issuance is forcing issuers to make attractive pricing concessions, according to portfolio manager Mark Haney. He points to a 10-year GMAC deal that is currently being marketed as an example of the favorable supply-demand technicals in the corporate market. The large A2/A auto finance company will probably have to sell its new paper next week at 215 basis points off of Treasuries, a 20 basis point concession to its existing 10-year paper.
Haney also recently bought into the recently issued 71Ž4% Elan Pharmaceutical notes of '08 (Baa2/BBB) at 208 basis points off of comparable Treasuries. Haney reasons the companies fundamentally sound operating outlook, which include what he terms "a promising" Alzheimer's treatment drug, will make this a core holding of his for some time. He notes however, that at 115-120 basis points off the curve, or midway to this asset classes historical tights, he would begin selling the position.
Another play Haney and his team have begun putting on is a relatively new type of bond structure called funding agreement deals, or general investment contract backed bonds. These are usually obligations of insurance companies, and have shorter maturities. Haney bought bonds issued by Monument Global Funding, an operating subsidiary of Aegon NV. This three-year 144a paper is Aa3/AA rated, and came at 123.5 basis points off of Treasuries. Though Haney notes their privately placed statues makes them rather illiquid, they offer a substantial yield pick up over comparably rated bonds, which were trading in the upper 90s off the curve.
The $800 million, Minneapolis-based fund has an asset allocation of 40% MBS, 30% corporates, 16% agencies and Treasuries, and 14% ABS. The fund is neutral to its proprietary internal benchmark, with a duration of 4.4 years.
