"In a market that's searching for yield, one way to play in the investment grade arena is to look for sectors you think have a benign to favorable prospect, and then look down in the ratings scale.
"So instead of getting the AA credit, you might want to look at BBB instead to get more yield. One sector where I think that fits well is technology, where the higher rated players are names like Hewlett-Packard , Cisco or IBM and some of the lower-rated names might be Agilent, Tyco Electronics and Intuit," he said.
Levington said that strategy worked well in 2010, when the return on investment-grade bonds was about 10 percent. He sees a return of only 2 to 3 percent for 2011.
He pointed to the example of Cisco — with a high A rating — which recently issued a 10-year, currently yielding 3.86 percent. That compares to Tyco Electronics , which issued a bond with similar maturity currently yielding 4.75 percent. Tyco has a BBB rating from all three rating agencies with a positive outlook, so there is room for upgrades.
"You can get high ratings vulnerable to downgrade, or low ratings that are upgrade candidates. To me, I'd rather be at the low end going up, rather than high end going down," Levington said.
Another example is health care, where big pharma has underperformed compared to some sectors, like pharmacy distribution. "You've seen an increase in health-care distribution so we've taken Cardinal Health , for example, [which] has been upgraded during the year. It has positive outlooks from two of the rating agencies, meaning it could get upgraded again in 2011," he said.
Cardinal's recently issued 10-year bond is currently yielding 4.7 percent. Fitch and S&P rate it high BBB with a positive outlook, and Moody's rates it low BBB but stable. Compare it to Merck , which has an average low AA rating. Merck's 10-year is at a 4.06 percent yield.