The Pacific Capital Diversified Fixed Income Fund may add Treasuries when the 10-year Treasury note reaches 4.75%, according to Janet Katakura, v.p. and senior portfolio manager at the Bank of Hawaii in Honolulu. The benchmark note was at 3.99% on Sept. 27. "I think 10-years are fully priced at these levels," she said. Katakura said she feels the 10-year Treasury could reach 4.5% by the end of the year and may reach the 4.75% level by early 2005.
The $290 million fund is invested 58.4% in high-quality corporate bonds and 40.7% in government securities, including Treasuries and agencies. Currently, the manager is putting new cash into money market funds or other cash equivalents. But when the yield on the 10-year goes up, she may use the 0.9% of her portfolio in cash holdings to pay for Treasuries. The move would take the fund closer to the index, which is composed of 41% Treasuries, compared to Pacific Capital's 18%. The manager uses the Lehman Brothers Government/Credit Index as a benchmark.
Katakura said the Bank of Hawaii is also watching the subordinated debt of agencies, particularly Fannie Mae, in light of the recent widening of Fannie Mae's yields due to an accounting probe.
The fund is currently composed of 18% in Treasuries with maturities across the curve and 2% in triple-B corporate bonds. It is overweight in double-A and triple-A corporate bonds. The portfolio's average duration is 4.68 versus the 5.3 duration of its benchmark.