Chris Towle, portfolio manager with Lord Abbett & Co., is rotating $225 million, or 5% of the portfolio, from pass-throughs into high-yield corporates in anticipation of a high-yield bond rally. Towle foresees a global shortage of yield that in turn will increase the bond market's appetite for junk bonds. He justifies this by comparing the historical high-yield average 573 basis point spread over the 10-year Treasury against last Monday's level of 775 basis points, and concludes there is room for further tightening. The rotation began a month ago and will continue for another couple of weeks as buying opportunities present themselves.
Some of Towle's recent buys include names in the utilities, healthcare and energy sectors. Within the utility sector he bought AES Corp 9.5% notes of '09 (Ba1/BB) at a 9.3% yield, or 440 basis points over the 10-year Treasury. In the healthcare sector, the firm recently bought Triad Hospitals 8.75% of '09 (B1/B-) at a 8.30% yield or 330 basis points over the 10-year Treasury. In energy, the firm bought Parker Drilling 9.75% notes of '06 (B1/B+) at a 9.50% yield basis with a 500 basis point spread over the five-year Treasury. Towle says that most of the firm's high-yield purchases (single-B and double-B rating range) are made at a target spread of 400 basis points over Treasuries.
The Jersey City, N.J.-based firm manages $4.5 billion in taxable fixed income. The firm allocates 80% of its assets to high-yield corporate bonds, 10% to investment-grade corporate bonds (mostly triple-B and single-A) and 10% to pass-throughs. With a 4.60-year duration, the fund is neutral its bogey, the Merrill Lynch High-Yield index.
