Napoleon Rodgers, portfolio manager withAlpha Capital Management, says he is going to rotate 15% of the firm's portfolio, or $15 million, out of Treasuries into mortgage pass-throughs, as he expects mortgages will outperform Treasuries with the prospect of stable or slightly higher interest rates. There is no trigger for this move besides the anticipation that, although the Federal Reserve may not tighten this year, the recovery should cause long rates to move up relative to short rates, hence shaping the curve in a more positive slope, he says. As a result, mortgage products should perform well due to their negative convexity and offer additional yield pick-up, he says.
Rodgers will sell Treasuries in the 10-year range, as he says those bonds have enjoyed a nice run up. By doing so, he is also looking at bringing his portfolio duration closer to his benchmark, the Lehman Brothers aggregate index. With the proceeds, he will invest in MBS pass-throughs with a modest premium. He is looking at buying 6.5% Freddie Mac bonds with a 4-4.5-year average life, which last Tuesday, were bid at a 102.75 price. He will also consider Fannie Mae bonds with a 6.25- 6.75% coupon in the 5.50-year average life, he says.
Rodgers manages a $100 million portfolio out of Detroit. He allocates 40% to Treasuries, 24% to MBS, 14% to financial corporates, 10% to industrial corporates, 4% to utilities corporates, 6% to agencies and 2% to cash. With a 5.60-year duration, the portfolio is slightly long its benchmark, which has a 5.30-year duration.
