American Express Financial Advisors is looking for an opportunity to take off its Treasury barbell and move to a neutral weighting in the three- to five-year part of the curve. Colin Lundgren, portfolio manager of $10 billion in taxable fixed-income, including a $4 billion core product, says the firm sold $40 million in 30-year Treasuries and bought some $150 million in off-the-run five-year maturities last Monday. It still has one more such trade to make to fully remove its barbell. "It's the next big move away. If we have another month of 50 basis point flattening between fives and 30s, we'd do it again." But, while Lundgren does believe the curve will continue to flatten as the market begins to anticipate an eventual interest rate hike, he does not expect this month to be as bullish as the last.
In its mortgage portfolio, Amex may look to swap ordinary pools of lower coupon 15-year pass-throughs for TBAs. Lundgren says 5% and 5.5% pass throughs trade at a premium, because they are most easily used to create collateralized mortgage obligations, which investors are snapping up to protect from duration extension that would result from a Treasury sell-off. Lundgren says 4.5% of its core portfolio, or $180 million, is allocated to 15-year 5.5% pass throughs, though the firm will not sell the entire amount.
At a duration of about 3.9 years, the Minneapolis-based firm is 10% short its bogey, the 4.0-year Lehman Brothers aggregate index. It allocates 40% to mortgage-backed securities, 22% to corporates, 20% to Treasuries, 13% to agencies, 3% to CMBS and asset-backed securities and 2% to cash.
