Trevor Stewart Burton & Jacobsen will move $100 million from short-term agencies to long-term agencies, said Alan Kral, managing director and portfolio manager of $475 million in fixed income in New York.
Kral is planning to sell two-year agencies that are callable in six months and use the proceeds to buy agencies with maturities of five to seven years that are callable in a year to a year and a half.
The shift will lengthen the portfolios' duration from more than a year short of its portfolios' benchmark, the Lehman Brothers Aggregate Bond Index, to three quarters of a year short, Kral said. The portfolio's current duration is 4.5 years, versus the Lehman Aggregate's duration of 5.8 years. "We have been believers for a long time that the Fed has put too much stimulus in the economy," Kral said. "We were expecting inflation to come back aggressively, which would drive up interest rates. Now we've decided to become less aggressive on the short side."
Trevor Stewart will lengthen out as far as the '09 agencies. Within agencies, the firm is mostly invested in Federal Home Loan Banks, with less than 5% of its 25% allocation to agencies invested in Fannie Mae. The manager said he prefers FHLBs because they provide higher yields than Fannie Mae and Freddie Mac debt. "We were fortunate we did not have a lot of exposure to Fannie Mae with the recent problems they've been having," he added.
Kral's funds are invested in 70% Treasuries and 25% agencies, with a mixture of corporates and mortgage-backed securities making up the difference. The shift into longer agency paper won't affect the overall allocation to the sector.