Cheah thinks there is a good chance yields will rise for two reasons: One, there could be selling for profit taking and two, foreign central banks could sell for currency stabilization. The fund manager says he will be a big buyer of GNMAs and Treasuries under these conditions. "I like to buy when others are selling," he explains. Cheah thinks the GNMA 5% are fairly valued at 101.16, 5 1/2% at 102.28 and 4 1/2% at 98.10.
The fund's current allocation is 80% in GNMAs, 10% in Treasuries and 10% in cash. Of the GNMA portion, 60% is in 5% coupons, 30% are 5 1/2% notes, and 10% are of the 4 1/2% variety. He declined to quantify how much he might buy if Treasuries back up. The duration of his portfolio is 4.5 years, neutral that of the benchmark. The fund's benchmark is a composite of the Merrill Lynch Mortgage Index and the Lehman Brothers Treasury Index.