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Vermont Fund To Add Treasuries When Rates Back Up

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The Sentinel Bond Fund may rotate 10-15% of its allocation out of mortgage-backed securities and into Treasuries if the yield on the 10-year Treasury backs up to between 4.375 and 4.5%.

Ken Hart

The Sentinel Bond Fund may rotate 10-15% of its allocation out of mortgage-backed securities and into Treasuries if the yield on the 10-year Treasury backs up to between 4.375 and 4.5%. Ken Hart, co-portfolio manager of the $100 million Montpelier, Vt., fund with David Brownlee, said, "If rates back up quickly then we'll take off MBS and pick up Treasuries." The 10-year Treasury was at 4.24% on Nov. 29 but Hart thinks it is heading toward 4.5% due to the dollar's decline. "Because of the weakness of the dollar, we'll see international fund flows out of Treasuries," he stated, anticipating a sell-off from foreign investors.


The fund has a 72% MBS allocation and a 28% corporate allocation and will pick up longer dated paper if rates back up. The fund's duration is 3.75 years. Hart is currently executing a duration barbell strategy with his MBS and corporate allocations. "We're leery of corporate spread levels and are positioned defensively... with corporates being tight we've been looking at seasoned pools of MBS on the front-end of the yield curve," he explained. Sentinel's exposure to MBS is in five-years and under and its corporate exposure is in 10- and 30-year paper. Hart said he finds MBS more attractive on a risk-reward, duration-to-yield basis. "We're negative on the bond market right now due to inflationary pressures and the continued weakness of the dollar," he added.

Sentinel currently does not see a lot of value in the corporate bond market. "Spreads are tight and there's limited issuance which puts the market in a great technical position, but fundamentally we think you need to be careful," said Hart, noting the widening within the insurance sector following the announcement of New York Attorney General Eliot Spitzer's investigations illustrates potential volatility risks. The fund has diversified across a wide range of sectors and individual names and Hart mentioned he likes some real estate investment trust credits such as Simon Property Group and Duke Realty because he believes they are fundamentally stable companies.

The manager is slightly overweight REITS, neutral autos and slightly underweight utilities because Hart said he doesn't think they will tighten further. He declined to quantify his weightings. Sentinel is run based on the Lipper Corporate Debt Funds A-Rated Index but Hart added he looks at the Lehman Brothers Credit Index for its diversification of names and weightings, though he doesn't use it to benchmark the fund.

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