Steven Jones, portfolio manager at St. Louis-based Missouri Valley Partners, says he will swap $20 million, or 20% of his portfolio, out of mortgage-backed securities and corporates if spreads on both credit products come in by 40 to 50 basis points, something he anticipates happening by year-end. He will invest the proceeds into Treasuries. The rationale is to take the Treasury allocation from its current underweight to market neutral.
For corporates, Jones will look at selling the finance sector. He will consider the sale of Morgan Stanley 6.60% notes of '12 (Aa3/AA-), which were trading at 149 basis points over Treasuries last Monday, as well as the Bank of America 7.80% notes of '10 (Aa3/A) which were at 171 basis points over the curve last Monday. On the mortgage-backed side, he will consider selling the higher coupon Ginnie Mae 7.50% 30-year pass-through bonds. He reasons that as rates go up and the curve flattens, spreads on those bonds will come in.
Jones says he will buy five- to 10-year Treasuries as he expects the curve to flatten, making the belly of the curve the most attractive part to buy. By year-end, and with the recovery well underway, Treasuries will be less rich and profit-taking in both corporates and mortgages will then make sense, he reasons.
Jones manages a $100 million core portfolio out of $840 million in total fixed income. He allocates 46% to corporates, 41% to mortgages, 12% to Treasuries and 1% to cash. With a 5.08-year duration, his fund is slightly shorter than the benchmark, the Lehman Brothers aggregate index, which has a 5.35-year duration.
