The Bank of Oklahoma Financial Corporation, the Tulsa-based holding company that includes the Bank's funds from Oklahoma and several other states, is seeking to pick up additional yield by adding $300-400 million in 2.5- to three-year planned amortization class and sequential commercial mortgage obligations. Lee Allen, manager of $3 billion in taxable fixed-income, says the holding company would sell one-year CMOs to finance the purchase. Before he invests, Allen wants to see five-year Treasury yields drop to 4.10% or 4.15%: last Thursday, five-year yields were 4.21%. He says such a move would suggest economic weakness as well as the stabilization of five-year rates, and convince him that the Federal Reserve will remove its easing bias on short-term interest rates. Allen says the holding company would probably add 6% coupons to guard against prepayments. However, he would consider 6.5% coupons, if the unemployment rate tapered off at 5.5% and retail sales numbers showed strength.
Allen says the Bank of Oklahoma is maintaining a 15-year trade it made earlier this year when it moved down in CMO coupon (BW, 8/20). It may sell some of that paper if the economy proves stronger than Allen expects. One way Allen would measure such strength is by looking at retail sales, which would need to be above 2% for him to regard it as strong. A particularly strong retail sales figure, coupled with other positive economic information, could lead the company to reverse the trade entirely, selling some $300-400 million.
Allen uses three-year PACS as a benchmark, and the fund's duration is currently 2.3 years. He allocates 57% to agency CMOs, 23% to whole-loan CMOs, 10% to pass-throughs and 10% to U.S. government securities.
