AIM May Add Treasuries, Sell Mortgages
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AIM May Add Treasuries, Sell Mortgages

AIM Investments may buy up to $92 million in Treasuries and sell an equal amount in mortgages should 10-year Treasury yields reach 5% by the middle of the year.

Scot Johnson

AIM Investments may buy up to $92 million in Treasuries and sell an equal amount in mortgages should 10-year Treasury yields reach 5% by the middle of the year. The asset manager would also bring the duration of its AIM Intermediate Government Fund closer to neutral in that scenario, according to Scot Johnson, portfolio manager. Johnson manages the $920 million fund from Houston. Ten-year yields were 4.14% as of Jan. 20. Johnson said he would balance out his underweighting in Treasuries and his overweighting in mortgages by up to 10% through buying two- and 10-year nominals. However, his move would depend on yields reaching 5% over a series of large yield movements, he cautioned. In that scenario, the manager said he would also lengthen the fund's duration. It is now at 2.5 years, or three-quarters of a year short its benchmark.

Johnson said he believes 10-year yields will realistically reach 5% by the middle of the year, where they would more accurately reflect the strength of the economy. He said at that point he would lessen his defensive positioning to one more neutral his index's weightings. "Judging by the behavior of the bond market it seems like moves toward lower yields are pretty grinding, while moves to higher rates have been rather jolting," the manager noted.

The Intermediate Government Fund is composed of 70% in mortgage-backed securities, 20% in agencies and 10% of Treasuries, and is overweight the mortgage sector by 12% and underweight Treasuries by an equal amount. Of the MBS, 50% of the portfolio is invested in Fannie Maes, 15% is invested in Freddie Macs, and 10% is invested in Ginnie Maes. The fund's agency holdings are split between Freddie Mac, Fannie Mae and Federal Home Loan Bank debentures. The fund's bogey is the Lehman Brothers Intermediate U.S. Government and Mortgage Bond Index.

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