Deutsche Bank Private Wealth Management is looking to swap up to $700 million out of three-month high-grade corporate floaters and into five-year bullets as it exits a barbelled curve-flattening strategy.
The asset manager is reversing its strategy in response to the rising-rate environment, according to Michael Kastner, head of taxable fixed income. Kastner oversees $10 billion in taxable fixed income from New York. He is swapping 5-7% of his portfolio out of three-month finance floaters to five-year bullets of similar names. The manager declined to specify names, but said he continues to like the finance sector. "There's still spread out there and net margins have held up fairly well," Kastner said.
On the other end of Kastner's barbelled strategy, the manager has swapped 6% of his portfolio out of 25-year Treasuries and into the seven- to 10-year bucket. The reversal comes as spreads between 10- and 30-year Treasuries have narrowed to 37 basis points on Feb. 7 from 125bps when he entered the curve flattening trade. The manager had entered the barbell position more than a year ago in anticipation of the curve flattening and exited very recently because he saw the 10s/30s spread could widen.
Kastner's bogey is the Lehman Brothers Intermediate Government/Credit Index. His duration is 85% of the index at 3.1 years, versus 3.7 years for the index. Despite the lengthening of maturities in corporates, the manager's duration will remain the same. The manager is overweight Treasuries, neutral corporates and has only a small exposure to asset-backed securities, with no exposure to mortgage-backed securities.