Chandler Asset Management will look to extend the duration of its portfolio by swapping one- to two-year agency debentures and buying three- to four-year debentures. Marty Cassell, portfolio manager overseeing $1.3 billion, estimates the trade would involve about $40 million in assets and raise the firm's duration from 2.12 years to 2.2 years. He believes rates have gone too low on expectations of another rate cut by the Federal Reserve, which he sees as unlikely. Cassell was looking for two-year Treasury yields to return to 1.90% before pulling the trigger on the trade. Last Monday, yields had backed up to 2.04% from that level.
Cassell is also seeking to add to its corporate bond allocation, particularly in the consumer finance sector, which has been roiled by headline risk associated in particular with Household International. He says that though the Household 8% notes of '05 were trading at an attractive price of 300 basis points above Treasuries last Monday, he feels there is still too much uncertainty about the company's exposure to legal action related to accusations of predatory lending. He wants to see some resolution of those issues before investing, even if it means losing some spread. Chandler is also looking at a five-year issue from Countrywide Credit that was trading at 155 basis points over Treasuries. However, Cassell wants to wait for clearer signs that the economy is turning, largely in the form of corporate earnings statements. He says Chandler is unlikely to increase its corporate allocation before November. When it does, it will sell agencies to buy $65 million in corporates, all of which could be divided between two or three names in consumer finance.
At a duration of 2.12 years, the San Diego, Calif., money manager is slightly short its bogey, the 2.17-year Merrill Lynch 1-5 year government bond index. Chandler allocates 63% to agencies, 22% to corporates, 12% to Treasuries, 2% to cash and 1% to asset-backed securities.
