C.S. McKee & Co. plans to put new cash to work in agencies, investment-grade corporates and, to a lesser degree, mortgage-backed securities. Brian Allen, v.p. and portfolio manager of $1.3 billion in taxable fixed income at the Pittsburgh-based investment manager, says the firm is putting cash to work in existing allocations and the purchases will not affect the portfolio's makeup. The portfolio is also running money short of its benchmark's duration, given expectations the economy will continue to roll and rates will rise. Allen declined to reveal specific bonds he may buy. Roughly 65% of the $1.3 billion is run against the Lehman Brothers Aggregate Bond Index. The duration of the portfolio is 4.2 years, or 95% of the Lehman index.
Currently, the fund is underweight mortgages at 15%, compared to 35% in the index; underweight high-grade corporates at 22%, versus 26% and at 56% is overweight govvies, compared to 34%. The rest of the portfolio has 3% in cash, with the remainder in asset-backeds and commercial mortgage-backeds.
Allen, like many investors, is maintaining a short-duration position because he thinks short-term rates will rise in the next six months. Although he expects rates will be higher, Allen predicts the Federal Reserve won't make any drastic moves, and will instead hike rates in 25 to 50 basis point increments. Allen expects the yield on 10-year Treasuries to rise to 4.95-5% by the end of the first quarter.