Wright Investors Services is pondering adding up to 5%, or $125 million, to its mortgage-backed securities allocation. James Fields, portfolio manager who manages $2.5 billion at the Milford, Conn. firm, says he is waiting for 10-year interest rates to stabilize near 5%, 30-year mortgage rates to go above 7%, and an improvement in corporate earnings, before making the move. Fields says he has been buying 15- and 30-year 6.5% and 7% paper, but will look at 7-7.5% bonds as rates begin to rise, in order to take advantage of a lower prepayment risk environment. He says the firm mostly owns Ginnie Mae bonds, although he says he has been adding Freddie Mac and Fannie Mae pass-throughs recently, as they have widened relative to the federally guaranteed Ginnie paper. Fields says the firm will likely sell five-year Treasuries to finance the move, as Treasury yields have been quite low recently given the broad-based fixed-income rally, and he wants to stay close to Wright's bogey, the 4.6-year Lehman Aggregate index.
Fields says he will also consider shifting downward in corporate credit quality as he sees economic improvement. While he is restricted from investing in junk names, he says he would consider shifting 2%, or $50 million in assets, from higher-rated corporates into triple-B names. He says he has no specific wish list at the moment, but says the firm likes paper stalwart Georgia Pacific (Baa3/BBB- senior note rating), energy companies such as Enron (A3/A-) and discount retailers Target Stores (A2/A+) and Wal-Mart (Aa2/AA).
Wright allocates 34% to MBS, 30% to corporates, 18% to Treasuries, 12% to Agencies, 3% to asset-backed securities and 3% to cash. At 4.7 years its duration is slightly long its benchmark.
