David Killian, portfolio manager with Stone Ridge Investment Partners, says his firm will reallocate 8%, or $14 million of its portfolio, out of Treasuries into both mortgage-backed securities and corporates as soon as he sees evidence of an economic rebound. He anticipates that the move will be done early next year, triggered by jobless claims leveling off, a slight pick-up in manufacturing orders and a rise in consumer confidence.
When Stone Ridge makes the rotation, Killian says it will sell Treasuries across the board because the government bond rally should have reached its high. The MBS trade is based on the belief that rising interest rates will provide pass-through bonds with better convexity, thus enhancing their overall performance. To this end, the firm will be looking into the higher coupon sector of Ginnie Mae and Fannie Mae pass-throughs. The rationale behind adding corporates will be higher earning prospects, he indicates, especially in two sectors, insurance--due to increased premiums--and consumer retail, where performance should increase as consumer confidence builds.
The Malvern, Pa.-based manager manages a $165 million portfolio which has an asset allocation of 49% corporates, 40% MBS, 10% Treasuries and 1% ABS. With a 4.50-year duration, the fund's duration is neutral to its benchmark, the Lehman Brothers aggregate index.
