Waddell & Reed Investment Management Co., a money management firm in Kansas City, Kan., is looking to add 5% ($28.5 million) to the MBS allocation in its $575 Waddell & Reed Advisors Bond fund, assuming further steepening in the yield curve.
Jim Cusser, portfolio manager of $800 million including the fund, says corporates have outperformed in recent weeks, and, while there may be room for further tightening, he believes mortgages have further to go. Cusser will buy better structured, cash-flow type (current or premium) agency CMOs, assuming the spread between the Fed funds rate and the 30-year U.S. Treasury bond climb to 250-300 basis points. The spread was 160 basis points when Cusser spoke to BW before last week's FOMC meeting.
In addition to using cash to finance his expected MBS purchases, Cusser will likely exercise the 8/15 put option on his Motorola 8.40% of '31 (A3/A-). The bond was trading at $92 early last week, and the put would allow him to sell it at par. He may also sell investment-grade corporates, though he declines to say which ones.
Cusser says the portfolio allocates 50% to investment-grade corporates, 27% to MBS, 10% to U.S. Treasuries, 10% to U.S. agencies and 3% to cash. The portfolios modified adjusted duration is 4.63 years, versus the Lehman Brothers aggregate at 4.72 years, largely reflecting the fact that 28.9% of Cusser's bonds are puttable.
