Principal Capital Management is planning to shift an additional 5%, or $325 million, of its $6.5 billion in multi-sector portfolios into mortgage-backed securities, says Lisa Stange, portfolio manager and bond strategist. She says the move will occur when the Lehman Brothers SOX index--which measures short-dated swaption volatility--pulls back from its recent highs of 43.5. She declined to offer a specific figure that would trigger the move, other than noting she seeks a level of short volatility that is more historically normal. The trade, to be financed by the sale of Treasuries in the five-to 10-year sector, is being put on because MBS, as well as callable agencies, traditionally outperform as volatility decreases, given the decreased probability of consumer refinancing. The trade would involve current coupon Ginnie Mae and conventional pass-throughs.
Stange argues that the firm, which is traditionally a large buyer of corporate bonds, will likely stay on the sidelines for the forseeable future given concerns over the quality of corporate earning reports. She says the firm would only buy credits that have the ability to deleverage rapidly and that possess hard assets. Stange reasons that industries attractive under these guidelines include defense, consumer products and financial institutions.
The Des Moines firm has a market weighting allocation of 38% MBS, 30% corporate bonds, 10% Treasuries, 8% agencies, 7% commercial mortgage backed securities, 5% asset-backed securities and the rest cash. It uses the Lehman Brothers aggregate index as its benchmark and at a 4.30-year duration, is slightly short the bogey's 4.50-years.