Marty Margolis, portfolio manager with Public Financial Management, says he will rotate his firm's short and intermediate fund by 8%, or $200 million, from agencies into Treasuries. The reason for the move, he says, is because agency bonds in the less than two-year maturity range have seen their spreads over Treasuries tighten by eight to 10 basis points during the second quarter, which makes them eligible for liquidation as spreads are bound to widen, he says.
Margolis says he will sell short bullet agencies because callables are cheaper by a couple of basis points. Callable agencies have cheapened due to supply and demand reasons, he explained, as there has been an increase in callable agency issuance over the past three weeks. With the proceeds, Margolis will invest into off-the-run Treasuries in the 18-month to two-year maturity range. A trade example could be the sale of Fannie Mae 4.75% of '04, which traded at six basis points over the curve, last Monday. With the proceeds, Margolis would buy an off-the-run Treasury with a 22- or 24-month range maturity.
Based in Harrisburg, Pa., Margolis manages a $2.5 billion portfolio out of total of $11 billion in taxable fixed-income. He allocates 52% to agencies, 43% to Treasuries, 2% to corporates rated double-A or better and 3% to cash. With a 1.53-year duration, the fund is 5% short than its index, the Merrill Lynch one-to three-year Treasury index, which has a 1.65-year duration.
