Bank Leumi USA has been borrowing in the repurchase market and selling commercial paper to add $200 million to its portfolio. The trade is primarily in mortgage-backed securities such as 6.5% 15-year mortgages, five-year balloon mortgages, well-structured planned amortization class collateralized mortgage obligations and U.S. government securities. Robert Giordano, who oversees some $2.2 billion in taxable fixed income for the U.S. subsidiary of the Israeli bank, says the bank is looking to take advantage of the steep yield curve in the two- to three-year area to pick up additional yield when shorter-term rates are low. While most of the $200 million program was complete as of last Monday, Giordano was still watching the direction of the two-year Treasury bond before investing the last $37 million. With two-year Treasuries yielding 3.35% last Monday, Giordano said an additional two to three basis points of tightening would convince him to invest the remaining funds, which would consist of $20 million in MBS and $17 million in U.S. government securities.
Giordano says he would consider doing additional borrowing to make further investments in MBS and agencies if the economy does not rebound as the market expects. He notes "If the price of oil continues to rise, the jobless rate stays in the 5.7% to 5.6% area and consumers pull back at all, we might do it again."
When the current program is complete, the New York-based affiliate will have a duration of 2.3-2.35 years, which is approximately 0.5 years long its historical average. The portfolio does not follow a benchmark. It invests 42% in corporates, 37% in MBS, 16% in U.S. government securities and 5% in asset-backed.
