Fiduciary Trust Co. will seek to buy up to $400 million in current coupon mortgage-backed securities to take advantage of spread widening due to expected refinancing activity. Mike Materasso, a portfolio manager who oversees a $4 billion core fixed-income portfolio, says that while refinancing risk is still high, he believes it will soon diminish. Before making the trade, the firm is waiting for spreads to widen beyond 200 basis points, or for 10-year Treasury rates to stabilize or increase. Spreads on 30-year Fannie Mae 6% notes were 198 basis points over Treasuries last Monday afternoon, while 10-year Treasury rates were at 4.24%. Materasso says Fiduciary will sell premium coupon notes to finance the trade.
Longer term, Fiduciary will look to add to its corporate exposure. Materasso says that due to the fact that corporate bond spreads are worse than they were after Sept. 11, it is not necessary to buy the riskiest names to outperform the Lehman Brothers aggregate index. The firm will stick with names in which it is already invested once the stock market stabilizes. Materasso also believes the Aug. 14 deadline for ceos to sign-off on their firms' financial statements will help provide stability. In the media sector, Fiduciary will add to Newscorp and Viacom 10-year paper. In the auto sector, it may look to extend its two- to four-year Ford Motor Co. and General Motors bonds further out along the curve, rather than increasing the total assets invested in the names, says Materasso.
Fiduciary's core portfolio allocates some 36% to MBS, 28% each to corporates and Treasuries, 7% to agencies and 1% to asset-backed securities. At a duration of 4.30 years, it is neutral its bogey, the Lehman Brothers aggregate index.
