Stone Ridge Investment Partners will increase its corporate bond exposure by up to 6%, or $8 million, if spreads widen, possibly on weaker-than-expected earnings reports or continued investor nervousness over the lack of jobs. David Killian, portfolio manager of $130 million in taxable fixed-income, argues that stimulus from the Federal Reserve and tax cuts will contribute to growth of over 4% for the next several quarters.
Despite increased productivity, Killian believes the jobs picture will eventually improve. "At some point, companies have to add to payrolls to meet demand. It's just a question of when," he says.
Areas of the market where Stone Ridge could add exposure include autos, cable and credit card companies--sectors that should trade tighter if the economy improves, according to Killian. The firm recently bought the Capital One 5.75% notes of '10, which was priced at 160 basis points over Treasuries earlier in the month. Killian was also planning to look at the five-year portion of a deal from Ford Motor Co., which was priced last Tuesday.
Stone Ridge may also decide to buy mortgage pass-throughs, if mortgage rates show renewed volatility. Killian says he could raise that allocation by up to 9%, or nearly $12 million, though he expects rates to grind steadily higher, which would not present an opportunity in his view.
"Valuations in the mortgage sector aren't as compelling as they had been," Killian says. Whether the firm adds corporates, MBS, or both, it will raise money by selling Treasuries or agency debentures, Killian says.
At a duration of 4.5 years, the Malvern, Pa., investor is slightly short its bogey, the 4.6-year Lehman Brothers agregate index. The firm allocates 39% to corporates, 34% to MBS, 14% to Treasuries, 11% to agencies and 2% to asset-backed securities.
