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Managers Flock To Long Corporates In Search For Yield

Fixed-income portfolio managers say they are adding longer maturity corporates viewed as recession-resistant, in order to pick up additional yield. One New York-based firm has been swapping out of long Treasuries into bonds of companies such as Kroger, IBM, Tyco International, Qwest Communications andCoca Cola. A portfolio manager at the firm says that on a total return basis, long corporates declined 2.44% in September, while long Treasuries were up 0.23%. "We think this represents an opportunity," she says. She declines to mention specific issues at the which the firm is looking, but says they are all 30-year issues trading 10-20 basis points wider than where they were prior to Sept. 11.

A number of other money managers are also extending the maturity of their corporate allocation, says Louise Purtle, investment-grade strategist at Deutsche Banc Alex. Brown. As the Treasury curve steepens, she notes that managers are able to pick up a significant number of basis points by shifting to longer maturities. Purtle says the wisdom of an extension trade depends upon the goals of the investor. She says it is a good trade for insurance companies because it allows them to offset shortening duration in instruments such as mortgage-backed securities, in addition to capturing attractive yield. However, she notes that other investors may be constrained in adding such long-duration exposure, as it creates more volatility in the portfolio.

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