Paul Roland, portfolio manager with QCI Asset Management, says he will rotate 5% of the firm's portfolio, or $15 million, from agencies into corporates in anticipation of the economy showing signs of recovery, hopefully within three months. He says he will look at signs of inventory buildup and improved final demand as well as a steeper yield curve. He notes that as corporate spreads are wide and the recovery is underway, corporate spreads are bound to come in.
Roland will buy intermediate corporates and finance those purchases with short-term agencies. He will be careful not to extend duration too much as he expects interest rates to rise which usually means greater price depreciation for longer-term securities. He will buy into industrial, basic materials (metals) or consumer goods, stressing the importance of investing in cyclical bonds. An example of a trade could be the purchase of John Deere Capital Corp. 6% of '09 (A3/A-/A), which was yielding 186 basis points over Treasuries last Monday. Roland says he likes this company because it has shown resiliency during the downturn and has a good balance sheet. He would finance the purchase with the sale of debentures that have maturities of two years or less, for instance, the Freddie Mac 4.5% of '02.
Based in Pittsford, N.Y., Roland manages a $300 million portfolio. He allocates 60% to agencies and 40% to corporates. The fund's duration is 3.75-years, slightly longer than its benchmark, the Lehman Brothers government/credit index, which has a 3.50-year duration.