M.D. Sass may add up to about $35 million in collateralized mortgage obligations backed by discount 15-year mortgages with a 3.5% coupon. The asset manager likes these structures because in a curve-flattening environment they provide better value than CMOs backed by 30-year paper, according to Dominic Bruno, senior v.p. and manager of $1.8 billion in taxable fixed income from New York.
Bruno is selectively adding to his CMOs and may add a couple of percentage points to the sector. He is particularly looking for securities yielding 10-15 basis points over LIBOR on an option-adjusted spread basis.
Within Treasuries, Bruno is buying TIPS and selling nominals in the 10-year sector. He believes TIPS are a good value with breakevens around 234bps and with the consumer price index forecasted to be higher than that, he said. But for now, the manager is content to maintain his 2% weighting to TIPS, which includes the 1 5/8% of '15 TIPS.
In addition, Bruno is buying 15-20-year, high-yielding Treasuries, whose yields compress as they age. For example, Bruno's 8 1/8% of '19 Treasury position now yields 4.32%, 25bps over the current 10-year. He plans to hold onto these bonds to profit from yield compression as they near maturity, he said.
Bruno's benchmark is the Lehman Brothers Aggregate Bond Index. His portfolio is composed of 28% to Treasuries, 14% to agencies and 58% to agency mortgage-backed securities.
