Bond Strategy

Over the past two years bonds have provided good opportunities to adjust average maturity and pick up some incremental return. Note the fairly consistent moves in 10-year interest rates in the 2-year chart at the right (the yield is currently 4.77%). It has required some willingness to lean into the wind to see the real benefits of portfolio adjustments. We envision a continued trading range on bonds that will reward contrarian investment commitments.

In the second chart, you can see our Dynamic Duration Select Strategy is up 10% since the end of the second quarter of 2006 (6 2/3 months). Early outperformance was driven by aggressively positioning the portfolio to the decline in interest rates during the second half of 2006. This involved using long US treasury exchange-traded funds. In November and early December, performance was about even with the index due to a tempering of the interest rate bet. Finally, over the last month, performance diverged to the upside relative to the index as the strategy had a slight inverse exposure to interest rates. In the past several days we removed the inverse exposure and returned to a neutral interest rate posture.

Our Dynamic Fx Plus Strategy has a little different objective: to outperform the Lehman Aggregate Bond Index using a core position in US treasury ETFs and adding value through selective investments in strong or weak dollar investments. Interestingly, this strategy was up nearly the same amount as Dynamic Duration Select but with different investments. Recent outperformance is due almost entirely to a long US dollar position over the past several months. We reversed this last week and now have a moderate short dollar position. We continue to believe that, short of terrorist acts or some such thing, the dollar will remain in a fairly tight trading range. Investing around the edges has proven to be a value-added tactic.