Confident that the Federal Reserve easing policy has set the foundation for an economic recovery, Wells Capital Management will increase its MBS allocation by $100 million through the sales of some treasury bonds. In addition, and for the same amount, the firm will be moving down the credit spectrum on its corporate allocation in order to capture more yield, says Paul Single, portfolio manager with the San Francisco-based asset management firm.
Single says that at 30%, Well's MBS allocation is underweight compared to the 35% benchmark, which is one of the reasons he already increased it from 25% to 30% and is considering another 5% increase to bring it to neutral, providing that the MBS sector continues to perform well. Single thinks the underlying performance of the MBS sector is attributable to the decline of the implied volatility, which he expects to continue to fall once the Fed has finished its easing policy. Bullish on MBS bonds, he has been buying mostly 30-year current coupons but he also owns 15-year range agencies. Single anticipates the Fed will cut interest rates by another 25 basis points at the end of the month, followed by an additional 25 basis point cut this summer.
In another move destined to capture additional yield, Single is selling some of Wells' triple-A and double-A rated corporate bonds, replacing them with single-A and triple-B corporate bonds. In this move, the underlying rationale is again that the Fed's aggressive move will benefit the economy, allowing the spread-investor to take on some more risk. Single says he has been purchasing 10-year telecom bonds, but declines to indicate the issuer's name or coupon. He says he does not pick corporate bonds by sector, but rather, looks at the business outlook relative to the yield spread.
Single manages a $2 billion portfolio which is allocated 30% to corporates, 30% to MBS, 25% to treasuries, 13% to agencies debentures and 2% to ABS.
With a 5.31 year duration, the fund is longer its benchmark, the Lehman Brothers aggregate index whose duration is 4.92 years.
