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| Thomas Atteberry |
First Pacific Advisors may add at least $50 million to its holdings of agency floaters pegged to the two-year Treasury swap rate. First Pacific may make this move if a near-term sell-off drives 10-year yields to 4.60%, but the move would also depend on if it can find an issuer to underwrite such a deal, according to Thomas Atteberry, who manages $2.5 billion from Los Angeles. The manager is making this relative value play now as mortgages have richened and callable agencies are not yielding as much as six months ago, Atteberry said. Ten-year yields were at 4.46% on April 12. Atteberry is looking to bring his approximately 4% in CMS-based agency floaters to at least 6%, making it roughly even with his holdings of CMT-based agency floaters. He said he will bulk up the percentage through new cash and the proceeds from agency bonds that have been called away. He said he prefers CMS-based agency floaters over CMT-based floaters because in a rising interest-rate environment swap spreads will rise to Treasuries. In addition, for the same coupon, should a market adjustment cause investors to flee to Treasuries, CMS-based yields will stay the same or rise while CMT-based yields will fall.
One example of a callable agency Atteberry owns but would not buy again due to spread tightening is a Federal Home Loan Bank of '09 bond with a monthly call option and a coupon that increases by 25 basis points every quarter for the first two years. If the bond is not called away before the two years is up, the bond becomes a 6% bullet.
Atteberry's portfolio is composed of 21% cash, 13% Treasuries, 25% agencies, 24.1% mortgages, 11.7% corporates and 1.9% in asset-backed securities, with the remainder in international bonds, common stock and convertibles. His benchmark is the Lehman Brothers Aggregate Bond Index.
