Smith Breeden Associates will add to positions in corporates and mortgages if and when spreads widen. Jay Gladieux, portfolio manager in Chapel Hill, N.C., expects spreads will widen because of increased volatility and because he expects a pullback given recent gains and an uncertain economic environment. The firm manages a total of $30 billion in fixed-income assets, with $2.5 billion run against the Lehman Brothers Aggregate Bond Index.
Given his expectation for further volatility, Gladieux says the firm is positioned to take advantage of higher yields by adding spread product. As the market gets volatile, Gladieux states that other investors will be forced to sell at cheap levels and he will be ready to buy at those levels. "If we have significant volatility like [two weeks ago], we will take advantage of that by buying on the weakness," he says, noting that the additions will be selected on a bond-by-bond, relative value basis within credit and mortgages.
Gladieux adds that he prefers auto and finance paper because of their high yields, but declines to name specific credits he may buy or quantify how much money he may put to work. But, for example, he says that if spreads on a proprietary option-adjusted model the firm uses widen by 10-15 basis points, Smith Breeden would up its exposure to corporates in "a meaningful way." He declined to be more specific.
