Swiss Re will add $1.5-2 billion in corporates--up to 10% of its $20 billion life insurance portfolio--once the U.S. stock market and corporate earnings show signs of stabilizing. The move would not be based on the expected war because the outcome is too uncertain, says Andre Moutenot, portfolio manager of $35 billion in taxable fixed-income. He believes 10-year Treasury rates are certain to back up from 3.76%. Similarly, he says benchmark corporate bonds such as the Ford Motor Company 7% notes of '12 are sure to trade tighter than their levels last Wednesday of 336 basis points over Treasuries. However, Moutenot says he does not know when the market will stabilize and declines to give specifics about what triggers Swiss Re will look for before taking the plunge.
To buy corporates, Swiss Re will use assets from increased mortgage refinancing activity. The insurer will also sell asset-backed and U.S. agency debentures to raise the necessary funds. In the short- to intermediate-term Swiss Re will look to add defensive sectors such as supermarkets and consumer goods, though here the best value is in the primary market, Moutenot says.
Slightly longer-term, the firm will look to the secondary market for Ford Motor Company bonds, which have been trading at historic wides for over a month. Moutenot also likes the cable sector, which he says has proven cash flow numbers. He also mentions Nextel Communications as a company that continues to produce strong numbers but still has bonds trading in the 60s and 70s. Moutenot declines to mention other specific bonds or issuers that the firm is considering buying.
At a duration of 6.7-years, the New York firm's life insurance assets are short its bogey, a 7.1-year custom index created from the Salomon Smith Barney Broad Investment-Grade bond index. The portfolio has some 60% in corporates, 10% in Treasuries, 10% in mortgage-backed securities, 9% in agencies, 5% in asset-backed securities, 4% in high-yield and 2% in cash.