Baxter Capital Management is looking to swap some of its agencies and Treasuries for the bonds of cyclical companies, such as carmakers and manufacturers, which could see spread-tightening if the economic downturn proves to be less severe than some have predicted. James Herreman, a v.p. who oversees approximately $400 million in taxable fixed income, says it's premature to forecast a recession on the basis of poorly performing stock markets and earnings warnings. He acknowledges economic activity has fallen off, but notes the unemployment rate, for one, remains "extremely low." As a result, he believes spreads on cyclical corporate bonds could tighten over the next six to twelve months. He is unsure how much he will ultimately allocate to cyclical corporates. Herreman and his team, who have not yet identified any particular credits, would look to make moves a couple million dollars at a time out of five- to 15-year agencies and Treasuries and into corporates with similar maturities, so as to remain slightly long the 4.51-year Lehman Aggregate. The Indianapolis-based firm's Lehman Aggregate portfolios are allocated roughly 38% to MBS, 26% to corporates, 19% to agencies, 8% to Treasuries, 6% to ABS and 3% to cash.
