Groupama Asset Management plans to shift 20-25% of its portfolio, or $30-37 million, from Treasuries into corporate bonds, betting that interest rates will rise over the next 12 to 18 months. Dan Portanova, portfolio manager, says the loss of the U.S. government surplus will also hurt Treasury rates. He says the firm will look to acquire bonds of industrial companies such as Tyco International, General Electric, 3M Worldwide and Ingersoll-Rand, which he says typically perform well during the early stages of a recovery. "Things are in place for us to start putting these types of trades on and it's just a matter of availability," he says. Portanova hopes to find bonds in three- to seven-year maturities, as he believes they offer the best value at present.
Portanova is particularly interested in the Tyco 6.5% notes of '06 (A2/A+), which were trading at a spread of 140 basis points over comparable Treasuries last Tuesday. He says Groupama already owns some of the paper, and wants to take advantage of recent spread-widening as a result of rumors about company accounting practices coming under regulatory scrutiny. Portanova believes the company already addressed the issues raised in an earlier investigation, and he views the business as solid. Groupama was actively looking to add to its position at the time of the interview. As for the other companies, Portanova says the bonds are highly illiquid and difficult to find, or, as in the case of GE, may require him to hope for new medium-term note issuance from the company.
One more liquid name Portanova plans to add is the Citigroup 6.75% of notes '05 (Aa2/A+). As a diversified financial services company Citigroup should benefit if the economy grows at the 2.5% rate forecast over the next 18 months by Groupama, he said. Also, because the bonds are quoted at 75 basis off the five-year Treasury but mature earlier, they offer more yield than it appears--closer to 110 basis points versus comparable Treasuries.
At a duration of 3.4 years, Groupama is slightly short its benchmark index, the Lehman Brothers Intermediate/Government credit. It allocates 58% to Treasuries, 30% to corporates, 6% to asset-backed securities and 6% to mortgage-backed securities.
