"Triple-Bs and below have had two fantastic years; there seems to be no upside [to investing there]. It's more likely to be a disappointment," explained Gifford. He expects spreads to widen modestly at some point during the year but declined to predict when the widening will occur. "Credit fundamentals support tight spreads but we're nearing the peak in the credit cycle," the manager added. He noted while he has upgraded his credit quality, he has not underweighted credit.
Gifford is overweight mortgage-backed securities by 20%, which he said are more attractive from a credit and spread perspective than agencies. The manager is underweight debentures relative to its benchmark by 5%. "With so much headline risk of late, I'd rather have some real property behind my investment," he explained. First Source is underweight Treasuries by 15% because it believes spread product offers better returns.
First Source's duration is 85-90% that of its benchmark, which Gifford expects to maintain for the foreseeable future. He anticipates the Federal Reserve will raise rates by 25 basis points at a time until rates enter the low 3% range. He recently brought his portfolio back to neutral in the 10-year portion of the curve by picking up corporate and MBS because he doesn't think inflation is rampant and 10-year paper offers good yield.