Mitch Stapley, portfolio manager at Fifth Third Investment, will rotate $200 million, or 5% of the firm's portfolio, from agencies into Treasuries to take advantage of the recent softening of Treasury prices generated by the rebound of the stock market. An indication of this trend, he says, is the recent increase in the 10-year Treasury yield from its 3.55% low on Oct. 9 to 4.04% last Monday. He argues that last week's Treasury auction will continue to back up the 10-year Treasury's yield as the market copes with the new supply. A trigger for his move would be when the 10-year benchmark reaches a 4.25% yield, he says.
Stapley does not hold a bullish view on the economy for next year. While he believes there will be growth, he sees it as very subdued and he does not foresee a sharp increase in interest rates. With other factors of uncertainty looming ahead, such as more potential corporate scandals or a volatile geopolitical environment, conditions will be in place for a flight to quality, which is why he anticipates Treasuries rallying further at some point next year. He says that at 10%, his firm is underweight Treasuries, another reason to add government bonds. He will buy into the five- to 10-year part of the curve, as he manages an intermediate portfolio.
Stapley will finance those purchases by selling five-to 10-year agency debentures. He declined to name specific issues. With the curve being as steep as it is, the intermediate part of the curve is where he expects to maximize his profits.
The Grand Rapids, Mich.-based investor manages a $4 billion portfolio. He allocates 40% to corporates, 30% to agencies, 10% to mortgage-backed securities, 10% to Treasuries and 10% to asset-backed securities. At 3.0-years, the fund's duration is slightly short its benchmark, the Lehman Brothers intermediate government/credit index, which has a 3.62-year duration.
