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Baltimore Investor Underweights Credit

Cavanaugh Capital Management is underweighting credit on the view spreads will widen because of a possible curve inversion that could put pressure on the economy and the corporate market, according to Tom Graff, portfolio manager of roughly $800 million in fixed-income.

Cavanaugh Capital Management is underweighting credit on the view spreads will widen because of a possible curve inversion that could put pressure on the economy and the corporate market, according to Tom Graff, portfolio manager of roughly $800 million in fixed-income. Cavanaugh's 10% corporate allocation is roughly half that of its benchmarks', which include the Lehman Brothers Aggregate Bond Index.

"The level of high grade credit spreads is extremely tight right now and it's very hard to see it getting any tighter, it's a real case of risk with minimal reward," Graff continued. "I don't see a lot of upside for credit at the moment." But the manager does see value in financials, especially brokers, where he can take advantage of other investors' fears due to the flattening yield curve. "It's overall higher credit quality stuff with the most yield spread in 'AA' and 'A'," he noted.

The fund manager has been putting its new cash primarily into treasuries, taxable municipals and some agencies. The strategy revolves around investments with solid credit and minimal risk, commented Graff. They have also been investing in longer paper on the view that the yield curve will continue to flatten out.

Graff is 5% overweight mortgage-backed securities with a 40% allocation to the sector. "I'm not personally adding anything in mortgages, but I do see it as good way to pick up carry[trade] at the short end of the market, so yes I think there's value there," added Graff. Cavanaugh's fixed income portfolio is also comprised of a 15% allocation to Treasuries, 10% agencies, 20% taxable municipals and 5% miscellaneous. His duration is 4.4 years.

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