Fiduciary Eyes Duration Extension
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Fiduciary Trust Company International will consider extending its duration if 10-year Treasury yields climb back to August levels of 4.50-4.60%. Mike Materasso, global head of the firm's $18 billion taxable bond portfolio, sees 10-year yields staying in a range of 4-4.75%, and adding duration would be in anticipation of the 10-year likely returning to a lower yield ahead of a full-fledged recovery. Materasso says Fiduaciary might add duration by buying longer-dated corporates, particularly if a rise in Treasury yields coincides with a surge in corporate issuance that causes spread widening. If a particular sector sees a flood of new issuance, it may temporarily create indigestion for the market, leading to a buying opportunity in that sector, Materasso says.
Fiduciary recently shortened its duration when 10-year yields briefly dipped below the 4% mark--a move that paid off handsomely after the better-than-expected September jobs report sent yields up to 4.20% on renewed optimism about the economy. "We weren't positioning ahead of the jobs number, but we felt that Treasury yields at a 4% handle seemed to be appropriate given the economic growth we've seen, and I believe the Federal Reserve is not just jawboning but they are serious in terms of keeping monetary policy stable at 1%," Materasso says. The firm sold 30-year Treasuries equivalent to 4% of its portfolio in order to lower duration, moving the money it raised into four- to six-year Treasuries and cash equivalents.
At a duration of roughly 4.18 years, the New York firm is 5% short its bogey, the 4.4-year Lehman Brothers Aggregate index. It allocates 30% to investment-grade corporates, 30% to mortgage-backed securities, 12% to Treasuries, 10% to non-U.S. dollar bonds, 10% to high-yield, 6% to agencies and 2% to preferred stock, which it uses as a corporate bond surrogate.