TheUnited Nations Federal Credit Union is looking to increase its allocation to Adjustable Rate Mortgage Securities by up to about $80 million. Christopher Sullivan, cio, sees continued weakness in Treasury prices, which would be less harmful to ARMS holders than investors in fixed-rate MBS. He says data pointing to rising industrial materials prices, increased spending on construction and a narrowing of the trade gap show that the economy is strengthening. Money growth is quite high, Sullivan says, arguing that as inventories rebuild and personal consumption increases, inflationary pressures are likely to follow.
Sullivan sees further incentive for buying ARMS in the fact that the securities have cheapened even more than the rest of the MBS sector in recent weeks, possibly, he says, because they have not received much support from dealers. The bank recently purchased $10 million in three-year ARMS, and will continue adding three-, five- and seven-year product assuming they remain cheap to the rest of MBS without weakening substantially further. If 10-year yields hit 5% or slightly higher, Sullivan will likely start adding 10-year ARMS. He says most of the money for the purchases will come from new cash or money thrown off by the existing portfolio.
At a duration of 2.0-years, the New York-based investor is short its 3-year bogey, which is a customized version of the Lehman Brothers aggregate index. It allocates 53% to Treasuries, 14% to MBS, 13% to taxable municipals, 9% to Treasuries, 6% to corporates and 5% cash.
