Meeder Financial will raise its cash position from zero to 50% of assets under management by selling $400 million in bonds--$360 million in Treasuries and $40 million in agencies. The move will cut the duration on the portfolio in half, to 2.25 years. Joe Zarr, portfolio manager, says he anticipates an impending economic turnaround with the end of the easing cycle, and aggressively shortening duration is representative of a belief that rates will back up from current levels. The large cash position is designed to have assets ready for reinvestment at an undetermined future date.
Meeder Financial will begin unwinding its position when the long bond reaches a 5.61% yield or a price of 96.20. Last Thursday, the 30-year Treasury yield was 5.43% and its price was 99.15. Another indicator will be the September Treasuries futures contract: if the contract closes below 102.18, a price level last seen on Aug. 3, Zarr says he will begin the sales.
Zarr declines to specify how long the firm would remain 50% liquid. One of the reasons it can afford to keep half of its assets out of the market is that its primary investment objective is capital preservation. The firm's current Treasury holding averages 10 years in maturity. The agency bonds, all straight bullets, have a 10-year average term with 5.75% or 6% coupons. The sales would most likely come from these sectors.
Zarr manages a $800 million taxable fixed-income portfolio and is based in Dublin, Ohio. The fund's asset allocation is 90% Treasuries and 10% agencies. With a 5.50-year duration, the fund is long its benchmark, the Lehman Brothers Government /credit index, whose duration is 3.0-years.
