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Lone Star State Fund Shifts Corporate Sectors

The Texas Permanent School Fund has been taking profits in financial services industry paper as spreads have narrowed in response to the Federal Reserve Board's easing of interest rates. Carlos Veintemilles, who manages $4.5 billion for the $7 billion fixed-income fund, says he has sold $20-25 million each in names including Bank One, Wells Fargo and Bank of America. The Bank One 7.12% notes of '11 (A1/A-) traded at 173 basis points over Treasuries on March 23, and came in to 129 over on July 27 before he sold them. The Bank of America 6% of '09 (AA3/A) followed a similar trajectory, going from 180 to 137 in the same time frame. Veintemilles says the fund is currently keeping the assets raised from the sales in cash.

Veintemilles has also been adding to utility paper to take advantage of spreads widening from concerns relating to the California energy crisis and an expected supply shortage in New York. It has recently picked up $25 million in NRG 8.96% notes of '16 (Baa3/BBB-), which traded at 230 basis points over Treasuries on July 15, and were at 220 last week. It has also added Con Edison 7.50%s of '10 which traded at 180 basis points over Treasuries on July 6 and were at 167 last Monday.

At a duration of 5.17 years, the Austin, Texas, fund is long its bogie, the 4.72-year Lehman Brothers aggregate index. Its asset allocation is 35% mortgage-backed securities, 30% Treasuries, 23% corporates, 7% in cash and 5% agencies.

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