Debbie Cervantes, portfolio manager at Patterson & Associates, says she will reduce the firm's 40% cash allocation by adding Treasuries and agencies. The move, which will total $400 million, will be split equally between Treasuries and agencies and may be completed over a few months. She says the purchase of those securities will begin as soon as the geopolitical environment improves and the uncertainty over war is lifted.
So far, the firm has remained invested on the short-end of the curve because there is no yield incentive to extend duration with the Treasury curve being so flat. As an example, she says that the one-month Treasury bill was yielding 1.20% last Tuesday against 1.25% for the one-year Treasury.
Cervantes did not specify any trigger for the move. She says it will depend on a quick and positive resolution of the uncertainty over a war with Iraq along with an improved economic scenario, as short-term yields will then rise under the assumption of a shift of the Federal Reserve policy towards a tightening bias. She notes that a positive scenario would be one in which the geopolitical uncertainty ends rapidly, citing a couple of months as a satisfying timeframe. She sees the Fed rising rates in the second half, but declined to predict by how much.
Cervantes reasons that once uncertainty ends, Treasuries will cheapen. In addition, she will add one-year bullet notes from Fannie Mae and Freddie Mac. Her buying target is when their spread over Treasuries widens to 15-20 basis points over the curve. Those securities were trading seven to eight basis points off the curve last week, she says.
Cervantes manages a $1 billion portfolio out of Austin, Texas. She allocates 40% to agencies, 40% to cash and 20% to Treasuries. The portfolio's average duration is one year. The firm does not use a specific benchmark, except the one-year Treasury.