Mesirow Financial is looking to maintain its overweight to mortgage-backed securities, by acquiring short-duration mortgages, to clip healthy coupons and remain flexible in a volatile interest-rate environment. JoEllen McBeth, fixed income trader and portfolio manager of $387 million in taxable bonds in Indianapolis, says the firm will continue to put new cash to work by purchasing MBS with maturities in the five to-seven-year range, on the view that yields are attractive because demand is centered elsewhere on the curve. "We're buying shorter mortgages because we want to build up income and so we're not locked in to 30 years," she explains. McBeth says the firm primarily uses the Lehman Brothers aggregate bond index, but stresses that it feels comfortable in making off-index bets and straying from the benchmark.
Mesirow is also short the index's roughly 4.6-year duration, with its own average life running at 4.2 years. Widespread expectations that rates will rise are motivating this strategy, she says, adding that Mesirow does not mind being short and taking on rate risk. "We feel the market is going up, so we've been short," McBeth adds.
Elsewhere, the firm holds an underweight allocation to investment-grade corporates, because bonds remain rich and McBeth says she is not entirely comfortable with credit risk in the current cycle. It would consider adding to corporates if spreads back up, but not at these levels. "I'm not going to buy a 10-year single-A name that's borderline," she notes. Instead, Mesirow looks to buy "well-known, well thought-of, higher-rated" securities from names such as Proctor & Gamble, she adds. McBeth says Mesirow does not invest in asset-backeds because spreads are too thin and they still pose an element of corporate credit risk.