Question

This excerpt comes from an article titled “Eagle Eyes High-Coupon Callable Corporates” in the January 20, 1992 issue of BondWeek, p.7:

If the bond market rallies further, Eagle Asset Management may take profits trading $8 million of seven-to 10-year Treasuries for high-coupon single-A industrials that are callable in two to four years according to Joseph Blanton, Senior VP. He thinks a further rally is unlikely, however.

Eagle has already sold seven-to 10-year Treasuries to buy $25 million of high-coupon, single-A nonbank financial credits. It made the move to cut the duration of its $160 million fixed income portfolio from 3.7 to 2.5 years, substantially lower than the 3.3-year duration of its bogey… because it thinks the bond rally has run its course…..

Blanton said he likes Single-A industrials and financials with a 9 ½ - 10% coupons because these are selling at wide spreads of about 100-150 basis points off Treasuries.

1. What strategy or strategies has (have) been implemented by Mr. Blanton?
2. What is meant by “the bond rally has run its course”? What is the implementation of this phrase on the future interest rate?
3. What is the outlook of Mr. Blanton on the spread between the single-A bonds and the Treasuries?
4. Why wouldn’t Mr. Blanton mind the Single-A industrials being callable?

Answer 1

ANSWER OF Q1:

As per the above extract it can be clearly seen that Mr.Blanton thinks bond yield would increase than the securities yield so he has shifted from treasuries to industrial and financials where spreads are comparatively high so he follows strategy of spread between 'callable and noncallable securities and also involve in credit spread strategy as is related with financial credits and yield spread strategy.

ANSWER OF Q2:

it means now market really will fade in future and it will lead to increase in bond yield in future so interest rate will increase in future.

ANSWER OF Q3:

Mr.Blanton believes that its time to move from treasuries to single A bonds as spread will be reatively high in that.

ANSWER OF Q4:

Mr.Blanton wouldnt mind the single-A industrials being callable because he has adopted other strategies like he has already sold treasuries to buy bonds so had got benefit of rate anticipation swaps and also yield spread strategy and last he said that single A industrials with 9.5% to 10% coupons because these are selling at wide spread of about 100-150 basis point off treasuries.