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 V.P. 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 9 1/2?10% coupons because these are selling at wide spreads of about 100?150 basis points off Treasuries."

What types of active portfolio strategies are being pursued by Eagle Asset Management?

Blanton may take profits by trading seven-to 10-year Treasuries for high-coupon single-A industrials that are callable in two to four years because the market rally will fade. This means Blanton believes the spread will stop decreasing and may even increase making these securities less desirable. By buying callable bonds, it is implied that interest rates may increase. Blanton has already sold some seven-to 10 year Treasuries to buy high-coupon single-A nonbank financial credits implying that he further believes interest rates will increase. In anticipation of interest rates increasing, Blanton has cut the duration of his portfolio so as not to be stuck with long-term investments in securities paying low coupon rates relative to market yields. Finally, Blanton has shifted from Treasuries to industrial and financials where the spread are believed to be relatively high.

From the above, Blanton appears to be following a strategy to capitalize on differences in spreads between callable and noncallable securities. For example, Blanton has bought some callable securities.Spreads attributable to differences in callable and noncallable bonds and differences in coupons of callable bonds will change as a result of expected changes in (i) the direction of the change in interest rates, and (ii) interest-rate volatility. An expected drop in the level of interest rates will widen the yield spread between callable bonds and noncallable bonds as the prospects that the issuer will exercise the call option increase. The reverse is true: The yield spread narrows if interest rates are expected to rise.

Next, Blanton is also involved in a credit spread strategy. For example, Blanton has already sold seven-to 10-year Treasuries to buy $25 million of high-coupon, single-A nonbank financial credits. Credit or quality spreads change because of expected changes in economic prospects. Credit spreads between Treasury and non-Treasury issues widen in a declining or contracting economy and narrow during economic expansion.

Additionally, Blanton is engaged in a strategy that involves changing his portfolio's duration. A money manager who believes that he or she can accurately forecast the future level of interest rates will alter the portfolio's sensitivity to interest-rate changes. As duration is a measure of interest-rate sensitivity, this involves increasing a portfolio's duration if interest rates are expected to fall and reducing duration if interest rates are expected to rise. For those managers whose benchmark is a bond index, this means increasing the portfolio duration relative to the benchmark index if interest rates are expected to fall and reducing it if interest rates are expected to rise. The degree to which the duration of the managed portfolio is permitted to diverge from that of the benchmark index may be limited by the client. A portfolio's duration may be altered by swapping (or exchanging) bonds in the portfolio for new bonds that will achieve the target portfolio duration. Such swaps are commonly referred to as rate anticipation swaps.

Further, it appears that Blanton is following is a yield spread strategy. Blanton isinvolved in positioning a portfolio to capitalize on expected changes in yield spreads between sectors of the bond market. For example, the excerpt states: "Blanton said he likes single-A industrials and financials with 9 1/2?10% coupons because these are selling at wide spreads of about 100?150 basis points off Treasuries." Swapping (or exchanging) one bond for another when the manager believes that the prevailing yield spread between the two bonds in the market is out of line with their historical yield spread, and that the yield spread will realign by the end of the investment horizon, are called intermarket spread swaps.