Baxter Capital Management, an Indianapolis money management firm with $1.4 billion in taxable fixed-income, plans to lower its duration and add some $20 million in lower-rated corporate bonds. Gary Baxter, portfolio manager, says economic indicators, including those in the manufacturing sector, seem to be bottoming out, and he believes interest rates will soon begin to rise as investors gain confidence that a turnaround is imminent. Last Monday, the 10-year note was yielding 5.16%, and 30-year bonds were yielding 5.57%. Baxter says an increase of 10 basis points in each of those yields will convince the firm to lower duration by 0.4-years, largely by selling longer-dated Treasuries.
Baxter says the lower-rated corporates he will buy will largely depend upon availability, but names he likes include retailer Kohl's (A3/A-), wholesale food distributor ConAgra (Baa2/BBB) and Southwest Airlines (A1/A+). In addition to selling Treasuries to finance the moves, Baxter will sell General Electric 81Ž8% notes of '08 (Aaa/AAA) and AMBAC-insured Verizon 6.46% notes of '08 (Aaa/AAA).
The firm allocates approximately 38% of its assets to mortgage-backed securities, 31% to corporates, 14% to Treasuries, 9% to agencies and 8% to asset-backed securities. At 4.6-years, the firm's duration is slightly under the 4.7-year benchmark Lehman Brothers aggregate index.
