SunAmerica Asset Management will buy $30-70 million in Ginnie Mae 8% bonds in an effort to pick up yield without taking on additional credit risk. It will sell Ginnie 6% notes. Michael Cheah, portfolio manager of $2 billion in taxable fixed-income, says he will look to make the trade within three months, by which time he believes the market will have stabilized. Until that time, he expects 10-year U.S. Treasury yields to trade within a range of 4.65-5.20%. Although many portfolio managers have been adding corporates or moving down in credit-quality on the expectation that the economy will improve, Cheah says he is worried that the possibility of additional Enron-style accounting difficulties makes corporates too risky a bet. He believes the economy is in worse shape than the real fourth quarter GDP growth of 0.2% suggests, since nominal GDP contracted by 0.1%. Among mortgage-backed securities, Cheah favors Ginnies because they have an explicit government guarantee. He also notes that at a spread of 135 basis points over Treasuries, they trade wide of double-A corporates, which were at 128 basis points over Treasuries last Monday.
SunAmerica bought $40 million in 10-year Treasuries last Tuesday morning, as accounting worries caused a flight from stocks into bonds. With the Dow Jones industrials index at 9,635, Cheah said he would buy an additional $50 million on Tuesday if the Dow continued to drop. He stressed, however, that the market was extremely volatile, and that he would sell Treasuries to buy current coupon mortgage-backed securities if the stock market bounced.
The New York-based firm's portfolio has a duration of 6.3 years, versus the 5.3-year Lehman Brothers Corporate/Government index. It allocates 70% to mortgage-backed securities and 30% to Treasuries.
