First American Asset Management has doubled its inflation-indexed bond exposure, from 2% to nearly 6%, by buying over $120 million in TIPS over the past six weeks, according to portfolio manager David Steele. The trade was driven not only by concerns about inflation, but also the perceived rich valuations of Treasuries, especially at the short end of the curve. The firm plans on remaining active, at least for the time being, in the 30-year TIPS sector. Steele plans on keeping the TIPS position at least until one of two things occur: the yield on the benchmark 10-year TIP bond drops through the 3% level (it is currently 3.50%), or the two-year note yield backs up 75 basis points, to 5.42% from its current 4.67% yield.
The $3.5 billion-in-assets fund has also been active in the corporate market, by expanding its existing positions in the banking sector, especially 10-year maturity paper, although Steele would not disclose specific names. The fund has also purchased several different telecom credits recently in the secondary market. Steele notes the fund is currently 5% underweight its bogey in the mortgage sector, something he attributes to the desire for corporate exposure in this market. The mortgage trades he has on currently are frequently of a barbell nature, combining structured CMO product with either discounts or slight premium coupon pass-throughs, in an attempt to grab as much convexity as possible. As a rule of thumb, Steele also is staying away from the new Fannie Mae and Freddie Mac subordinated notes, reasoning that the Street has not fully assessed the credit implications, and thus price levels, of their subordinated structure.
The Minneapolis based fund has an asset allocation of 37% corporates, 28% MBS, 17% Treasuries, 11% ABS and 5% ABS. Its duration of 4.55 years is roughly neutral to that of its benchmark, the Lehman Brothers aggregate.