Pat Moon, portfolio manager at Meridian Investment Managers, says he will swap 10% of the firm's portfolio, or $10 million, from Treasuries to investment-grade corporates, as corporates spreads are bound to tighten with the economic recovery. Moon reasons that some corporate names have seen their spreads over comparable Treasuries widen more than what is justified by their fundamentals, simply because "we are in a very unusual environment" characterized by corporate scandals and geopolitical tensions. He says that a year from now, providing economic conditions remain stable, corporate spreads could tighten by 100 basis points and the 10-year Treasury yield, rise to 4.50-5%.
Moon is considering the consumer non-durable sector for his corporate picks, but declined to give specific names. He will buy in the five- to 10-year maturity range, in line with his portfolio's duration and the names must fit with his portfolio's Aa3/AA- average rating. As examples of recent purchases, Moon says he bought the BellSouth 6% notes of '11 (Aa3/A+), which last Monday traded at 146 basis points over the curve. He reasons that although the bond trades in a sector that has seen spreads widen significantly, BellSouth, the largest of the regional Bells, offers a relatively safe play. He adds that he also bought the Gillette 3.50% callable notes of '07, callable in 2004 (Aa3/AA-).
Moon manages a $100 million portfolio out of Little Rock, Ark. He allocates 50% to corporates, 25% to agencies, 20% to Treasuries and 5% to cash. At a duration of 4.7-years, the portfolio is short its bogey, the 5.80-year Lehman Brothers government corporate master index.