State Street Global Advisors (SSGA) is planning to reduce its exposure to floating-rate bonds in its $6 billion asset-backed securities portfolio. Michael O'Hara, portfolio manager in Boston, said he is considering selling longer maturities in deals backed by credit cards and home equity loans on the view that spreads will widen soon. He plans to keep the proceeds in cash until spreads widen out by 10-15 basis points and would then reinvest at the wider levels. While not willing to put a figure to his sales or how they would affect allocations, O'Hara stressed that he would maintain his strategic overweight in ABS floaters and that this is just a slight shift to book profits.
O'Hara explained that he thinks spreads will widen, since floating-rate ABS have been the best-performing ABS sector of late. While O'Hara expects the spreads to widen a bit he does not expect any material change. He said a steep yield curve, tight swap spreads and a strong bid from managers ramping up collateralized debt obligations has led to the tight levels for structured products. "This ride cannot go on," he predicted, explaining that now is the time to take some chips off the table and wait for spreads to widen.
In the current allocation, compared to a composite of the Lehman Brothers asset-backed and commercial mortgage-backed securities indices and one-month LIBOR, the fund is about 15% overweight in CMBS. O'Hara said he likes the sector because credit performance is strong and it is a fundamentally cheap asset class. He also likes floating rate mortgage products and specifically the subordinate tranches of single A and AA home equity loans. The fund is about 15% underweight in fixed-rate ABS, such as credit card and auto securitization, which he said are trading at razor-thin spreads.
