Pennsylvania Buyer Takes On Call Risk

S&T Wealth Management Group is adding yield by buying callable intermediate-term agency debentures, said Chuck Frank, v.p. and senior portfolio manager.

  • 18 Feb 2005
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Chuck Frank
S&T Wealth Management Group is adding yield by buying callable intermediate-term agency debentures, said Chuck Frank, v.p. and senior portfolio manager. The Indiana, Pa., firm has $115 million in investment-grade taxable fixed income. Frank hedges rising rates by taking on call risk as lost coupons are replaced with comparable ones. He said callable agencies in the five-year range offer about 50 basis points in extra yield over non-callable paper and in the seven-year range, callable agencies offer an extra 60bps.

The strategy has caused some turnover in the portfolio, but only about 2-3% recently. If rates increase substantially and the 10-year Treasury yields above 5%, Frank will reverse the strategy. It was at 4.08% on Feb. 14.

S&T is eyeing the intermediate part of the curve. "If you look at how rates have changed, the five-to-seven year part of the market has been stable," said Frank, who added the intermediate part of the market has the best risk-return tradeoff.

Government bonds comprise 80% of Frank's portfolio and the manager said he will continue to buy agencies because he thinks they have little credit risk. "I believe the credit talk is more politics than potential," he commented, adding he believes there is little risk the federal government would not back agencies if they went under. The remainder of S&T's portfolio lies in corporate bonds, though Frank noted he has not added to his corporate allocation in years. He said credit spreads are too tight and corporates do not offer attractive enough returns at the moment but if he sees a value in a name, he will take advantage of it. Frank said he doesn't really pay attention to what an index is doing but does glance at the Merrill Lynch Intermediate Term Index.

  • 18 Feb 2005

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