QCI Asset Management will swap 10% of its portfolio, or $35 million, out of corporates into Treasuries when corporate spreads tighten by 50 basis points, which should happen toward the third quarter, says Paul Roland, portfolio manager. Roland notes that corporate single-A industrials, as of last Monday, yielded 100 to 135 basis points over the curve. Roland wants to see those spreads decrease to 50 to 85 basis points over Treasuries in order to trigger the move. He declined to specify any credits that would be sold.
Roland says that corporate spreads tightening to the firm's target level will suggest that that the economy is on track and that interest rates are at their highest. This does not mean, though, that the Federal Reserve will be done tightening, as there is usually a lag between Fed fund movement and Treasury yields. At that point, corporates will be rich enough to qualify for liquidation and the first sector the firm will sell will be financial corporates as it is cyclical and highly sensitive to economic recovery. The firm's corporate exposure is in utilities, industrials and financials.
The rationale behind the purchase of 10-year Treasuries is threefold. First, intermediate Treasuries will be used to reduce credit exposure without giving up too much yield. Second, from a diversification perspective, the sales proceeds could not be allocated to agencies, as the firm has already a 60% agency allocation and no allocation at all in Treasuries. Finally, buying into intermediate Treasuries will allow the firm to extend duration to 5.50-years, a move that the high level of interest rates will justify then, says Roland.
Roland manages a $350 million fund out of Pittsford, N.Y., with a 3.70-year duration, which is the same as the Lehman Brothers government/credit intermediate index.
