On the view that interest rates will rise toward year-end, Mellon Private Asset Management is buying longer maturity corporate bonds in anticipation of spreads tightening on the long end of the curve, says John Poole, portfolio manager in Boston. The overall strategy complies with his goal of staying neutral his benchmark's duration, in anticipation of a greater steepening of the curve. He also says that he has been buying shorter term ABS and MBS with the same thought in mind.
Poole says his corporate strategy consists of rolling out of short-term corporates to acquire equivalent names with 10-20 year maturities. He sometimes finances the trades via the sale of long-end treasuries, usually $30 million at a time. He declines to specify names of corporate bonds he likes, but he avoids technology, due the sector's volatility, as well as utilities, due to the difficulty in deciphering new regulations. He likes single-A and AA names in the financial and industrial sectors.
On the shorter end of the curve, Poole is a buyer of MBS and ABS because those products offer attractive yields with relatively low credit risk. Two thirds of his MBS portfolio is made of single family pass-through mortgages, with a slight bias to Ginnie Maes, as they offer more liquidity than Fannie Mae and Freddie Macs.
Poole manages a $1.5 billion portfolio, whose asset allocation is 40% MBS, 35% corporates, 13% treasuries, 9% agencies and 3% ABS. With a duration of 4.70 years the portfolio is slightly shorter than its benchmark, the Lehman Brothers aggregate index, whose duration is 4.74 years.
