HSBC Bank recently bought some $25 million in a combination of three- and eight-year U.S. Treasuries and agency debentures. Peter Loftus, portfolio manager of $700 million in taxable fixed-income, says those maturities offer the greatest potential for roll-down along a steep Treasury curve. He says that the still-weak labor market reflected in the recent employment report has temporarily put a floor on Treasury prices, though he still expects them to be higher over the next 12 months. To raise money for the purchases, HSBC used assets from cash and cash-equivalents that it had been building up when Treasury rates appeared to have fallen unsustainably low about two months ago, Loftus says.
Should yields spike dramatically upward from last Tuesday's 4.39% level, Loftus says HSBC would begin selling longer-dated securities in the eight-year range in an effort to trim duration. A gradual increase in rates, however, would not cause the bank to chase higher yields. "The market does have a tendency to overshoot, so if rates get to the higher end, our first inclination is to pause and let the market run its course," he says.
The New York-based investor's portfolios are neutral to slightly short versus one of their mostly commonly-used benchmarks, the 5.4-year Lehman Brothers government credit index. The bank allocates 30% each to Treasuries, agencies and corporates, and 10% to asset-backed securities.
