Stone Ridge Investment Partners is looking to swap out of AOL Time Warner 6.125% notes of '06 (Baa1/BBB+) and into Tyco International as investors in the latter credit have become nervous over Enron-related accounting issues. David Killian, portfolio manager of $175 million in taxable fixed-income, believes the Tyco worries are overdone. Once the firm provides more clarity on its proposed reorganization, Stone Ridge will look to add 1-2% of its portfolio, or $1.75-3.5 million, in Tyco bonds, and possibly WorldCom. The AOL bonds have not widened materially over the last two months, while the Tyco 6.375% notes of '06 have widened some 165 basis points in the last two weeks. Last Tuesday, they were bid at 90.5.
Stone Ridge will also shift 5%, or $9 million, to 15-year pass-throughs in what Killian believes is a rising interest rate environment. Killian says the firm will buy discount, current, and premium coupons in concert with their weightings in the Lehman Brothers Aggregate index.
The Malvern, Pa., firm allocates 53% of its assets to corporates, 35% to mortgage-backed securities, 11% to Treasuries, and 1% to asset-backed securities. At a duration of 4.2 years, it is slightly short the 4.5-year Lehman aggregate.