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Strategy – Relative Value
Relative Value & Benchmark Implications
The securities contained in the current benchmark indices consist of U.S. Treasury and Government Agency debentures. MDTA’s allocation to other spread sectors such as Supranational, Municipal, and Commercial should help performance longer term, but may cause short-term tracking error relative to the indices. Supranational Supranational bonds were added to the Investment Policy in December 2016, with a sector limitation of 30% and a single issuer limitation of 10%. At times, Triple-A rated Supranational bonds, such as the World Bank, offer relative value versus comparable maturity agency debentures. Target spreads are approximately 10-15 basis points over comparable maturity agencies. Municipal Municipal bonds are limited by policy to 20% of the portfolio, with a single issuer limitation of 5%. Triple-A taxable bonds are sought with spreads near 20 basis points relative to comparable maturity agencies. Municipals defeased with treasury securities are not subject to the policy limitation, as they are considered government securities. Target spreads are approximately 15 basis points over comparable maturity agencies. Commercial Paper CP is limited by policy to 20% of the portfolio, with a single issuer limitation of 5%. Three-month Tier-1 rated CP offered a 15 bp premium to agencies at the end of the quarter.
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