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Texas School Buys Credit With New Cash

The Texas Permanent School Fund is planning to add up to 2-3% of its portfolio, or $140-210 million, to corporate bonds over the next two or three months in a bid to add yield. Carlos Veintemillas, portfolio manager overseeing some $7 billion of taxable fixed-income in Austin, says he is looking at short duration single- and double-A credits. To finance the purchases, the fund will use the proceeds from prepayments in its mortgage-backed securities portfolio, and new cash from royalties the fund receives for oil and gas fields on public lands. Veintemillas says he is waiting for evidence of increased capital expenditures by companies before making the move.

Veintemillas declines to say which sectors of the corporate market the fund is eyeing. However, recent purchases include the Boeing Co. 5.75% notes of '07 (A3/A+), which were trading at 203 basis points over Treasuries last Monday. He says Boeing has been punished excessively for its reliance on the troubled commercial airline sector, given that it also has significant exposure to the defense industry, which is in good shape. The fund also recently added the CIT Group 5.5% notes of '04 (A2/A), which were trading at 321 basis points over the curve. Veintemillas argues that CIT spreads will improve now that it is no longer owned by scandal-plagued Tyco International.

At a duration of 3.81 years, the Austin-based fund is neutral to its bogey, the Lehman Brothers aggregate index. It allocates 31% to mortgage-backed securities, 28% to U.S. Treasuries, 22% to corporates, 11% to CMBS and 7.5% to agencies.

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