As the Treasury curve flattens, Turner Investment Partners will reallocate its exposure to 6% and 6.5% coupon pass-throughs from 65% to 45% (which would represent about $40 million in the core portfolios) by buying five- to 10-year Treasuries. Jim Midanek and John Pak, portfolio managers of $700 million in taxable fixed income, expect the Treasury curve to flatten because they see the Federal Reserve raising interest rates quickly once it begins a tightening cycle, likely bringing the Fed funds rate to 3% by the middle of next year. With 238 basis points of daylight between two- and 30-year Treasuries as of last Monday, Midanek says another 65 basis points of flattening between those poles would trigger the MBS sales.
Turner recently sold 5% of its portfolio, or $35 million, in TIPS of '08, in order to buy longer-dated TIPS due in '32. Midanek and Pak say they made the move to benefit from expected inflationary pressures. They say the eventual recovery, combined with a stabilization in global commodity prices after a long period of price declines, makes the threat of inflation a real concern.
At a duration of 4.40-years, the Walnut Creek, Calif., investment firm is slightly short one of its main bogeys, the 4.48-year Lehman Brothers aggregate index. Turner allocates 65% to MBS, 30% to Treasuries and 5% to asset-backed securities.
