Linda Patterson, portfolio manager of Austin, Texas-based Patterson & Associates, says her firm will place $250 million in new cash she expects to receive into short-term agency debentures in anticipation of a Federal Reserve rate cut in two weeks. Patterson says the firm's clients are government entities that are now collecting their tax money, which is why she expects the cash infusion. She reasons that she will place the cash into agency debentures instead of Treasuries--the only two asset classes in which the firm invests--because she believes Treasuries are overvalued versus agencies. She notes that agencies are currently yielding 23 basis points more than Treasuries on two-year and shorter maturities.
Patterson says that, even though agencies do not offer that much intrinsic value, the move still makes sense as long as the firm stays in agency bonds with maturities less than six months. By doing so, she can still benefit from potential price appreciation in Fannie Mae, Freddie Mac or Sallie Mae agencies between now and mid-year as she does not foresee a surge in interest rates before the end of the second quarter. She will likely make the move before the end of the month, as money market accounts and commercial paper, the basis for those cash positions, see their remuneration directly impacted by interest rates levels.
Patterson manages a $1.2 billion portfolio with an asset allocation of 75% agency debentures, 20% Treasuries and 5% money market accounts. The average duration is 11-months.