David Petrosinelli, portfolio manager at Shay Assets Management in Chicago, will reallocate 15%, or $660 million of the firm's $4.4 billion adjustable rate mortgage securities portfolio, from sequential ARMs that are paying down, into Fannie Mae ARMs. He reasons that Fannie ARMs provide a good pick for a defensive strategy in anticipation of a bearish bond market, as rates are due to go up, although he does not anticipate a dramatic increase this year. ARMs are mortgage securities that allow adjustment of the loan interest rates at pre-specified regular intervals.
Petrosinelli wants to add exposure to Fannie Mae ARMs as those bonds offer the fastest reset interval among all ARMs, every six months. Ginnie Mae ARMs for instance, only reset once a year. Petrosinelli will buy Fannie ARMs premium bonds yielding 2.75%, a 125 basis point yield pick up over cash. In theory, he reasons, cash offers a daily reset but it only yields 1.50%. Petrosinelli wants to allocate more to bonds that have a fast reset interval, in line with market rates, while picking up additional yield.
Petrosinelli allocates 40% to ARM sequentials, 15% to Fannie ARMs, 15% to Freddie Mac ARMs, 15% to cash, 10% to Ginnie Mae ARMs and 5% to CMOs. Duration is eight months. The firm uses the six-month Treasury bill as its benchmark.
