Munder Capital Management is trying to swap out of agencies and add single-A or better corporate bonds, increasing the firms corporate bond allocation by 5-10%, but it is having a hard time identifying the credits. "Because demand for corporates is strong, it is hard to find the name we like in the size we want," says Peter Root, the Birmingham, Mich.-based chief investment officer who oversees $5.5 billion in fixed income. It is focusing on swapping out of 30-year Treasury bonds and into 30-year corporate paper, an area it had been underweight last year, because the spread between agencies to corporates is wide. "Corporate spreads are wide to the interest rate swap market, and agencies stay close to swaps, so the relationship is a bit out of line," says Root.
The firm has been adding banking paper because "We're more comfortable with this sector now because of the friendly Fed." Last week it bought $15 million worth of the Bank of America (Aa3/A) 7.4% notes of '11 and recently added to its United Airlines (Aa2/AA) enhanced equipment trust certificates (EETC) position, buying some of the B-tranche (A1/AA-). The firm is swapping selectively out of some corporates, such as the Florida Power & Light's 7 5/8% notes of '06, because the company is being acquired and will likely be downgraded to BBB. The portfolio's asset allocation is 40% MBS, 30% investment grade corporates and 30% U.S. Treasuries. It is interest rate neutral with a 4.6-year duration.
