MTB Investment Advisors will put new cash to work in longer-dated Treasuries and agencies because it thinks the yield curve will continue to flatten, said Wilmer Stith, v.p. and portfolio manager at the Baltimore fund. MTB has $2 billion in fixed income under management and Stith manages a close to $1 billion largely investment-grade portfolio. "Curve flattening is the most dynamic aspect of the market [right now]," he noted, adding 30-year Treasuries and 10-year agency debentures should perform well as the curve continues to flatten.
MTB also likes 30-year Treasuries because of positive technical factors, including potential Social Security reforms that could boost demand for long-dated bonds and the Treasury's indications it does not plan to issue new 30-years, Stith added.
Stith's primary benchmarks are the Lehman Brothers Intermediate Government/Credit Index and the Lehman Brothers Aggregate Bond Index. His intermediate accounts have a 20% overweight to mortgage-backed securities, which are not part of the Lehman Intermediate Government/Credit Index, and a 5% underweight in agencies. Stith explained the positioning stems from concerns last year over headline risk and volatility in the agency sector. "We will maintain our MBS position until we see the carry trade show some signs of getting unwound," Stith said. While MTB has been expecting a flatter curve, the manager noted if rates are greater than 3 1/2% and the Federal Reserve raises rates at greater than 25 basis-point increments, the curve could flatten to a greater degree and he may unwind his MBS position.
MTB is slightly overweight corporates by 5% because Stith said it is "looking to higher yielding sectors like corporates and MBS to lessen the pain of higher interest rates." He noted the fund added its 3% high-yield component last year as part of its search for yield. Stith's duration is neutral with a barbell strategy as the curve continues to flatten. He noted he currently has a bias to be in the longer-dated spectrum.
