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| Michael Cheah |
AIG SunAmerica is loading up on 10-year Treasuries as yields back up, on the view rising adjustable-rate mortgage will pop the housing bubble and lead to a slowing economy. Michael Cheah, senior v.p. and portfolio manager of about $2 billion in mortgage and government bonds, says he plans to go long his index's duration of 4.9 years. Cheah uses the Lehman Brothers Government Bond Index and plans to raise duration from 5.1 years to 6.4 years. "I am scaling in to this market weakness and want to build a position for the second half of the year," said Cheah. The portfolio manager began using new cash to acquire 10-year Treasuries when the yield was at 4.15%. It was at 4.21% last Monday, but Cheah still believes in the trade because he expects the consistent Federal Reserve rate increases to take a toll on the economy and, in particular, on leveraged homeowners. He also thinks inflation remains in check and additional tightening by the Fed, although he expects it will occur, is unwarranted. "In the face of somewhat muted job creation, the Fed has no justification to tighten any more. Any more tightening and, to me, they are overprescribing the medication for inflation," he said.
As a result of the increase in short-term rates, Cheah said adjustable-rate mortgage rates will tick higher and may push some borrowers over the line. "I see the Fed over-tightening and that's going to create a disaster for the economy in the second half," he predicted, adding, "it makes it more interesting for me to buy bonds."
