Boston Advisors may sell a few million dollars in long Treasuries to finance an unusual out-of-index move to tax-free municipals. It may sell the assets to ramp up its muni holdings to 5-7% within the company's $110 million core bond portfolio. Long-end munis have only recently stood out among other fixed-income sectors as adding to total return, explained Todd Finkelstein, director of fixed income. He oversees $600 million in taxable fixed income from Boston.
Finkelstein is ramping up his holdings of municipal bonds from 3% to 5-7%. "My clients jokingly asked, 'Did you forget we're taxable accounts?'" he said, referring to the unusual move. He favors long high-grade munis, such as the triple-A '35 Louisiana State Gas Tax Revenue munis at 5% he recently bought. Conversely, the manager is selling a similar amount of 20-30-year Treasuries.
Within Treasuries, Finkelstein also recently took off the curve-flattening strategy he had adopted since late last year. He stopped overweighting the short and long ends of the curve when the 20s/30s curve reached 100 basis points last week. The Federal Reserve has historically eased monetary tightening when the curve reaches 80-100bps, the manager said. The curve was at 88bps on May 3.
In addition, Finkelstein had until recently been building up his position in 5/1 hybrid adjustable-rate mortgages because they are less susceptible to extension risk than pass-throughs in a rising interest-rate environment. Plus, because hybrid ARMs can reset 200bps in the first year after the fixed interest-rate period, he believes this may drive mortgage holders to refinance with a discounted ARM.
The core bond portfolio is composed of 10-12% in mortgage-backed securities, 20% in Treasuries, 5-6% in international bonds, 4% to commercial mortgage-backed securities, 6-7% in asset-backed securities and 5-6% in agencies. The rest is invested in corporates. The manager's benchmark is the Lehman Brothers Aggregate Bond Index.
