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California Manager Turns To T-Bills

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Chandler Asset Management is looking to increase its allocation to government securities as a bit of an insurance policy against a double-dip recession and deflation. Joe McCullough, v.p. and portfolio manager in San Diego, says the firm, which manages $1.5 billion in investment-grade fixed income, will increase its exposure to Treasuries in some accounts, even though he expects the economy to recover. For the $700 million it runs for accounts with a one- to five-year horizon, Chandler plans to increase its allocation to government bonds by $15 million, through sales of money market instruments and purchases of short-dated Treasuries. The sector currently accounts for about 10% and he would seek to raise it up to 12.5% at least.

"You really don't give up that much in Treasuries in, say, the one-year area relative to other instruments," he says, adding, "it would be some insurance in case something happens." For example, McCullough says one-year T-bills have an absolute yield of 103 basis points, compared to 110 basis points for a double-A corporate. "If you're going to buy Treasuries, it makes sense to do it where you give up the least amount of spread," he reasons.

Overall, the firm doesn't plan to avoid spread product. The accounts have a roughly 25% allocation to investment-grade corporates, near the maximum clients can have. "We think deflation is a remote possibility--in that regard, we think corporates will tend to do well," McCullough predicts.

The remainder of the portfolio is allocated 60% to agencies, with money market securities occupying a small bucket. The accounts are run against the Merrill Lynch government bond index and at 2.2 years, are generally flat on duration.

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