Mesirow Financial is looking to sell up to $125 million in investment-grade corporate bonds and swap the proceeds into short-term mortgage-backed securities. The move, says Bill Gossard, Chicago-based portfolio manager of $600 million in taxable fixed income, is part of a long-term play and will allow the firm to remain cautious with the expectation of higher interest rates. He gives two reasons for selling corporates. First, spreads on corporate bonds relative to Treasuries are historically very tight and, second, the risk going forward is that those spreads will widen. Gossard feels that the probability of tighter spreads is very small and sees corporates at the end of their run although he did not specify when he thinks spreads will head wider.
Gossard views it as a good time to take profits and advantage of high prices corporate bond to reduce exposure to corporates. Investment-grade corporates currently account for 55% of the portfolio and will be reduced to about 35%, he says. He declined to specify any particular corporate sector or company that he will sell, saying he invests across the board and noting the strategy is a broad asset allocation move and not a security-specific one. By moving into mortgages, he says he is switching from an expensive sector to a sector with more value in it.
Gossard plans to use the cash to buy five-year balloon, seven-year balloon and 10-year mortgage paper in the coming months and increase exposure to mortgages. These bonds are attractive because they have similar characteristics to five-year Treasuries and offer yields that are 75 basis points higher, he explains. Unlike last year, he expects the return from bond portfolios this year to come from the coupon as opposed to price appreciation. As a result, he's looking to put as much yield into the portfolio without taking on the price risk that corporates pose. And, the move into short mortgage paper is a way to reduce price sensitivity, as opposed to investing in 30-year Ginnie Mae debt, which is more volatile and sensitive to rate movements, he says. Mortgages now account for 7% of the portfolio.
