Wright Investors Service is considering whether to extend duration given that the recent run-up in bond yields makes it less likely they will move as sharply again anytime soon. Anthony van Daalen, senior v.p. and head of fixed income in Milford, Conn., says the manager may get closer to flat to its benchmarks.
"We won't go long, but perhaps we want to be a little less short than we are," van Daalen says, adding, "given the rapidity of this recent move we feel a replication of that type of move in the near term is a lower probability right now."
Wright Investors runs pension money against the Lehman Brothers aggregate, government/credit and intermediate government/credit indices, and is generally half a year short versus both. The Aggregate has a duration of 3.95 years and van Daalen says he will probably raise Wright's level to roughly 3.75 years.
Wright, which manages about $1 billion against these three indices, would swap out of two-year Treasuries and into longer-dated T-bills to raise its duration. With a steep yield curve, it's an attractive time to extend, van Daalen argues.
The firm would likely buy five-year T-bills, which were trading at 140 basis points wider than the two-years on July 18, or 10-year issues, which were at 250 basis points off. "If you go look back over the past 40 years, that's an extreme level, and if you believe in conversion to the mean, these are opportunities that can be exploited," he reasons. How much Wright would buy in longer Treasuries depends on whether it would extend via the five- or 10-year notes, he says.
Treasuries account for about 20% of the money run against the three indices. Corporates are 36%, mortgage-backeds are 30%, agencies are 12%, asset-backeds are 2% and the rest is in cash.
