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| Robert Millikan |
BB&T Asset Management may increase mortgage holdings by around 5% if long bond yields rally 10-15 basis points in one day, according to Robert Millikan, director of fixed income. Millikan, who oversees $5 billion in taxable fixed income from Raleigh, N.C., noted the increase would only be within those accounts whose mandates allow adding mortgages, declining to quantify them. The manager said the long bond could rally sharply if additional negative corporate headlines cause a flight to quality. The 30-year was at 4.64% on April 21. Millikan said the move is part of his strategy of replacing triple-B corporates with triple-A mortgages, which has increased his mortgage holdings to 40% from 30% since the beginning of the year. He believes credit risk is rising and spreads will widen. Within mortgages, Millikan likes 30-year pass-throughs: He recently bought a Fannie Mae 5.5% 30-year collateral pass-through.
At the same time, Millikan has reduced his corporate position from overweight to neutral the index. He has also upped credit quality, replacing triple-B credits with single- and double-A names because he believes he is not getting paid to take credit risk given the spread compression.
Millikan has also taken off his significant bias toward callable agencies in the last month. For the past year the manager had been adding heavily to three-year callable agencies with a three-month one-time call. Now with spreads to comparable bullets shrinking to 10-15bps from 40bps, the sector is no longer as attractive, he said.
Lastly, Millikan is 15% short his benchmarks' duration but could close that gap if the 10-year gets to 4.75%. Despite the recent nosedive in rates the manager believes the 10-year may still end the year in the 4.75-5% range. His benchmarks include the Lehman Brothers Aggregate Bond Index and the Lehman Intermediate Government Index.
