SEB Asset Management is looking to extend duration by roughly a year on the view that Treasury yields, especially at the long end of the curve, will be substantially lower than they are at present. Anders Ekernas, cio, argues that the economy is due for another shock some time in the next year as the highly levered consumer has yet to follow the lead of companies in cutting spending. "During the past six months greed has clearly dominated fear, with the riskiest assets dramatically outperforming the less risky, without much consideration for whether there's much reason for that. We'd like to take the other side of that trade, recognizing that we may look foolish and we may be a bit too early. I'd rather be too early than too late," he says. Ekernas says he may buy 20-year strips to add duration, as they would give him "more bang for the buck"--allowing him to increase duration dramatically while shifting a relatively small percentage of the portfolio in dollar terms.
As a trigger for the trade, Ekernas will look for some change in market behavior indicating that optimism is waning. Earnings disappointments or revelations of losses in financial institutions--particularly consumer and housing lenders, would be the most likely precursors of a renewed bull run for Treasuries, Ekernas says. While he sees a 50% chance that Treasury yields will continue to rise over the short term, he expects to make the extension trade some time in the next six months.
At a duration of 5.9 years, the Stamford, Conn.-based investor is slightly long one of its main benchmarks, the 5.5-year Lehman Brothers government credit index. It allocates some 67% to U.S. Treasuries, 23% to government guaranteed U.S. agency debentures and supernational issues and 10% to mortgage-backed securities.
