Th e following was reported in the “Strategies” section of the January 3, 2000 issue of BondWeek (“Chicago Trust to Move Up in Credit Quality,” p. 10):

Th e Chicago Trust Co. plans to buy single-A corporate bonds with intermediate maturities starting this quarter, as the fi rm swaps out of lower-rated, triple B rated paper to take advantage of attractive spreads from an anticipated fl ood of single-A supply. . . .

Th e portfolio manager gave the following reasoning for the trade:

… he says a lack of single-A corporate off erings during the fourth quarter has made the paper rich, and he expects it will result in a surge of issuance by single-A rated companies this quarter, blowing out spreads and creating buying opportunities. Once the issuance subsides by the end of the quarter, he expects spreads on the single-A paper will tighten.

A . What type of relative value analysis is the portfolio manager relying on in making this swap decision and what are the underlying assumptions? (Note: When answering this question, keep the following in mind. Th e manager made the statement at either the last few days of December 1999 or the fi rst two days in January 2000. So, reference to the fourth quarter means the last quarter in 1999. When the statement refers to the end of the quarter or to “this quarter” it is meant the fi rst quarter of 2000.)

B . Further in the article, it was stated that the portfolio manager felt that on an historical basis the corporate market as a whole was cheap. Th e portfolio manager used new cash to purchase healthcare credits, doubling the portfolio’s allocation to the healthcare sector. Th e portfolio manager felt that the issuers in the healthcare sector he purchased for the portfolio had fallen out of favor with investors as a result of concerns with healthcare reform. He thought that the cash fl ows for the issuers purchased were strong and the concerns regarding reform were “overblown.” Discuss the key elements to this strategy.