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Lone Star State Shop May Swap Agencies For Corporates

AMR Investment Services will rotate 10% of its portfolio, or $14 million, from agencies into corporate bonds should the Federal Reserve bring the Fed fund rates from its current 2.5% level to 2%. Bonnie Mitra, senior portfolio manager, says he considers 2% the bottom of the Fed easing cycle and the first trigger for a pending corporate bond rally.

Mitra says the firm will concentrate its corporate purchases in two sectors: financial services and retail sales. Some of the names the firm will be buying are Wells Fargo & Co. (Aa1/AA-), Bank of America (Aa2/A+), CitiBank (AA2/AA-) or Chase Manhattan Bank (AA3/AA). Those banks all have diversified client bases, and are not limited to one region, he says. Mitra says his firm likes Citibank the most, because it is the most diversified. The firm is considering buying 10-year Citibank notes providing that it can obtain the paper at a target 100 basis point spread over Treasuries. A good example is the 6.25% Citibank of '05, (a nine-year term note) whose spread over Treasuries was 101 basis points last Monday. On the retail side, the firm will look into Wal-Mart Stores, even though Mitra says this paper already trades tight. He notes that discount retail represents a recession-proof activity. The targeted spread for purchases is a minimum of 50 basis points over Treasuries from five to 10-year maturities. The firm will look at the 5.45% Wal-Mart Stores of '06, which yielded 78 basis points over Treasuries as of last Monday.

The Dallas-based firm has a $140 million portfolio which has an asset allocation of 30% agencies, 27% MBS, 15% corporates, 10% Treasuries, 10% ABS, 5% CMBS and 3% cash. With a 4.30-year duration, the fund is shorter than its benchmark, the Lehman Brothers aggregate index, which has a duration of 4.57 years.

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