On the view that a flight to quality induced by weak economic prospects will push Treasuries to rally further, Alan Segars, portfolio manager with ING Furman Selz Capital Management, is preparing to shift 5% of its portfolio, or $100 million, out of agencies into Treasuries. Segars says he will begin the shift provided that agency debentures tighten by an additional 10 basis points over the curve. He will look at buying five- to 10-year Treasuries because the Federal Reserve's easing policy has caused the short end to richen too much.
Segars says his firm owns five- and eight-year Freddie Mac debentures, which have coupons of 5.25% and 5.75%, respectively. When those bonds--which traded 45 basis points over the curve last Monday--begin to trade 35 basis points over the curve, the firm will trade out of those bonds and buy five- to 10-year Treasuries.
Segars says the firm anticipates an increased flight to quality within the bond markets, based on input the firm is getting from its proprietary inflation model. He says the model is based on commodity prices, and was down 14% during the first two weeks of October compared to the same period a month before. What that means, says Segars, is that the economy is heading towards an inflation rate lower than 1.0%, a sign that the economy is weakening. He argues that this will bring the 10-year Treasury, which was yielding 4.60% last Monday, to a 4.20% yield before year-end.
The New York-based firm has $2 billion under management and an asset allocation of 43% agency debentures, 41% corporates and 16% Treasuries. The fund's duration is 4.20 years, longer than its benchmark, the Lehman Brothers intermediate/government credit index, which has a duration of 3.70 years.