Blaylock To Cut Duration, Treasuries, Add Mortgages

Blaylock-Abacus Asset Management plans to cut duration aggressively, jettison entirely its short-dated Treasuries position and add collateralized mortgage obligations and other mortgage-backed assets for better yield in the coming months. Cynthia Plouche, who manages a $200 million portfolio based in Chicago, said good economic data and a sure rise in interest rates make Treasuries and agencies less attractive. Plouche explained that her position in two-year Treasuries, which accounts for some 2% of the portfolio, could be reduced to zero and replaced by CMOs and other mortgage-backed assets. She stressed that short-end Treasuries do not add value in a growing economy. Her next step would be to aggressively cut duration by selling longer-dated Treasuries and replacing them with a maximum of five-year instruments. This would reduce the overall duration of the portfolio, she explained. Plouche's benchmark is a composite of Lehman Brothers and Merrill Lynch one-to-three year government-corporate bond indices and her portfolio is currently duration neutral in relation to this benchmark. She describes her strategy as being "aggressively defensive." Her portfolio is heavily overweight in mortgage-backed securities and investment grade corporates and underweight in Treasuries and agencies. Explaining her rationale for adding MBS in a rising rate environment, she emphasized that specified pools in mortgage products would outperform Treasuries and agencies.