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Bearish Investor To Shed Credit Exposure For Treasuries

Winterthur Investment Management is planning to move 10% of its $2.5 billion investment-grade portfolio out of corporates and into Treasuries over the next three months.

Winterthur Investment Management is planning to move 10% of its $2.5 billion investment-grade portfolio out of corporates and into Treasuries over the next three months. The switch will bring its Treasury allocation to a 10% overweight, said Reto Koller, cio of the New York-based fund. He has already increased his Treasury allocation by 20% in recent months by reducing high-beta, lower-quality credits on the view the credit cycle is turning. "If you have to have money invested in fixed-income right now--ideally you want to have it in cash--then I say on a relative basis Treasuries offer better value," Koller stated. He explained his preference for Treasuries is a defensive move away from credit and not because he finds the sector particularly attractive in its own right.

Koller favors a barbell exposure to his Treasury allocation with a preference for 30-year paper, which he said offers good value relative to other parts of the curve, and the very short end. "It's basically a duration call, but that doesn't mean we don't have anything at all in the middle part of the curve," the manager noted. Winterthur's duration is currently 92% that of its benchmark, the Salomon Brothers Broad Investment Grade (BIG) Index and Koller expects the Federal Reserve to continue raising rates at 25 basis point increments. Despite his view the credit cycle has peaked, Koller thinks concern about inflation will prompt the Fed to raise rates until they are north of 4%.

Over the last three months, Koller has increased quality in his corporate allocation as he expects credit spreads to materially widen. He has been selling triple-B credits and picking up single-A names, as well as moving from high-beta sectors into more defensive areas. For example, he is significantly underweight autos, with his sole exposure to the sector lying in the two-to-three-year range in DaimlerChrysler paper. The manager does not hold any General Motors or Ford Motor Co. paper.

Koller estimated he has 10-15% overweights in defensive sectors such as consumer products and pharmaceuticals and declined to further specify his corporate allocation.

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