Evergreen Looks To Shorten
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Evergreen Investments will look to reduce duration by up to an additional 15% below its index ahead of anticipated short-term interest rate hikes by the Federal Reserve and an accompanying rise in Treasury yields. David Fowley, portfolio manager of the $515 million Evergreen limited duration fund, says having a shorter duration will help limit the effect of the Treasury sell-off. He sees the Fed tightening some time in the second quarter of next year, as companies begin hiring and signs of inflation appear on the horizon. Fowley cites continued strength in areas such as housing, autos and retail sales and massive fiscal and monetary stimulus among several factors indicating that rate hikes cannot be too far off.
In order to reduce duration from last Tuesday's level of 1.71 years to 1.45, Evergreen will likely sell two- and three-year agency debentures. It will also short two- and five-year Treasuries furtures contracts in order to avoid leaving such a sizeable amount in cash equivalents. In all, Evergreen will shift some $50-60 million in assets to reduce the fund's duration ahead of the expected Fed move.
At a duration of 1.71 years, the Charlotte, N.C., fund is 5% short its benchmark, the Lehman Brothers one- to three-year government credit index. It allocates 45% to corporates, 20% to structured product, 17% to agencies, 13% to Treasuries and 5% to cash and equivalents.