Andy Aran, senior v.p. of global fixed income and portfolio manager of around $10 billion at Alliance Capital Management, has been finding value in the Japanese banking sector. Aran started buying Japanese bank bonds within the last month and has built an overweight position in the sector. He declined to comment on the specific banks he likes.
He said he is looking for value in underrated bonds, especially in corporates and Treasuries. His portfolio is modestly underweight in Treasuries and modestly overweight in corporates. Within corporate sectors he is overweight European financials, insurance, electrical utilities and media. Additionally, he is underweight brokers and domestic banks within the sector.
Aran, who is 5% underweight his duration on the Lehman Brothers Aggregate Bond Index, is also being very selective in his buying of long-dated corporates. "It's difficult right now due to the flatness of the yield curve. We primarily invest on the five- to 10-year spread on the curve, staying more toward the five year," said Aran. "We currently have a difference of 27 basis points between the two- and 10-year." They are at 4.12 and 4.39 respectively. "We are approximately 100 basis points less than we were at this time last year," continued Aran. The return of the 30-year bond will add significant liquidity to the back end, Aran said, but he does not see it affecting the way he runs his portfolio because he prefers shorts over longer bonds.
