Martin & Co. is looking to gradually build up its allocation to U.S. Treasury securities as it scales out of agency debentures. Agency spreads are extremely tight to Treasuries on a historical basis and have little room left to run, argues Michael Holt, portfolio manager of the firm's $1.4 billion in taxable fixed-income. Holt says the firm could move 5%, or $70 million, into Treasuries if agency spreads show further tightening as investors gain confidence that the giant mortgage lenders are addressing governance issues and will grow less aggressively, which would likely mean less debt issuance.
Signs of a growing government deficit could also drive spreads tighter as Treasuries back up, Holt says. If spreads tighten by as much as 10-15 basis points, Holt could move a total of 15%, or $210 million, out of agencies and into Treasuries. Ten-year agencies were trading 33-35 basis points over Treasuries last Monday, or about 5-8 basis points wider than they were ahead of Freddie Mac's recent shakeup of top management.
Concerns over the recent management shakeup at Freddie Mac led Martin & Co. to move some $70 million out of Freddie Mac debentures and into Treasuries. Holt says continued negative headlines could also cause Martin & Co. to reduce its agency allocation. If, on the other hand, spreads remain where they were last Monday, Martin & Co. would likely stand pat, Holt says. In any event, the trades would be duration neutral, across a range of maturities.
At a duration of 3.0 years, the Knoxville, Tenn., money manager is short its bogey, the 3.7-year Lehman Brothers Intermediate Government/Credit index. It allocates 50% to agencies, 45% to corporates, and 5% to Treasuries.