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.