Loomis Sayles & Company is planning on rotating $200-400 million from investment-grade corporate bonds into MBS to capture the next big spread product move, says portfolio manager Curt Mitchell. He is waiting for single-A corporate 10-year swap spreads to tighten from 80 basis points off treasuries to the 70 basis point level before firing up the move.
Mitchell, who manages $4 billion, will buy MBS paper and probably move out of the 8% coupon sector and into the current coupon at 7%, assuming the 7% coupon becomes a little cheaper. He prefers conventional Freddie Mac and Fannies Mae pass-throughs to Ginnie Mae paper but declined to specify why. His MBS purchases will be on the 30-year portion of the curve; as opposed to 15-years because the core of his assets follows an index dominated with 30-year collateral. He also expresses little concern over refinance risk, seeing the greatest portion of the wave as having past.
Mitchell declined to provide specifics on the corporates that are the most likely candidates for sale, but he will look to get rid of defensive sectors first, on the view that the economy will recover toward the year-end. In the high-yield corporate sector, he is looking at unloading healthcare bonds at around 200-250 basis points off treasuries, 300-350 off for the utilities and 400 off the curve for the cable TV, chemical and retail sectors.
The Chicago based portfolio's asset allocation is 43% investment grade, 20% MBS, 18% high-yield corporate, 5% ABS (home equity and manufacturing housing), 5% agencies, 5% treasuries and 4% emerging markets. With a 4.45-year duration, the fund is slightly shy of its benchmark, the Lehman Brothers aggregate index whose duration is 4.67 years.
