Bob Alley, portfolio manager with AIM Advisors in Houston, says that he will swap 7% of the fund's portfolio, or $175 million, out of corporates into mortgage-backed securities over the next quarter. He anticipates that MBS will offer more protection in a rising interest rate environment due to their negative convexity. There is no particular trigger for this move, besides the widely anticipated Federal Reserve tightening action later on this year, which will flatten the curve, says Alley. He adds that his strategy also aims at reducing duration and giving up some convexity for more yield and less volatility.
Alley will buy 7%- 7.5% coupon 30-year Fannie Mae or Freddie Mac pass-throughs as a way to keep the firm's portfolio to a five to six-year duration. He will finance the purchases through the sale of one to seven-year corporate bonds rated single-A or double-A. He adds that by swapping into MBS, he expects to pick up some yield but declined to quantify the spread. Alley would not specify any particular names targeted for sale but said he would liquidate bonds within the industrial sector first, as he sees these are fully valued.
Alley manages a $2.5 billion portfolio. He allocates 55% to corporates, 25% to MBS, 12% to Treasuries and 8% to debentures. With a 5.75-year duration, the fund is longer its benchmark, the Lehman Brothers aggregate, which has a 4.80-year duration.
