Investors Management Group is planning a spending spree of up to $300 million in seasoned 7.50% conventional MBS pass-throughs over the next several weeks because it thinks the refinancing wave is over and mortgage rates will begin to back-up. Kathy Beyer, portfolio manager of the Des Moines, Iowa-based fund, says the timing reflects the fact MBS have under-performed year-to-date, and are poised for a rally should Treasuries continue to pare the gains they've made in the first quarter. This would bring her MBS allocation up to a neutral weighting on her firm's $2 billion bond portfolio, from 20% to 35%. Also, the refinancing wave that hit MBS so aggressively in the first quarter--the Freddie Mac survey of 30-year mortgage rates is now at 6.89%--makes seasoned bonds, or paper that has survived several pre-pay waves, more valuable.
A strategy Beyer has already started is investing in asset-rich credits in out-of-favor sectors. J.C. Penney 7.60% notes of '07 (Ba2/BBB-) are one example. Beyer's research team likes the aggressive new management, and believes the Street is underestimating balance sheet liquidity, after property sales and the closure of its catalogue. The bonds are yielding 12.5%, more than 750 basis points wider than Treasuries. Another position she has recently put on is the Comdisco 9.50% senior notes of '03 (Baa2/BBB). This paper yields 19%, a fact she attributes to a misinterpretation of the tech-leasing company's financial exposure to customers, which are primarily new economy start-ups and internet ventures. She is comfortable with the investment-grade level of the bond, and sees little threat to its cash flows over the next few years.
The asset allocation of the firm is 35% corporates, 20% MBS pass-throughs, 15% U.S. Treasuries, 10% ABS, 10% agencies, 5% taxable municipals and cash. The firm uses the Lehman Brothers aggregate as its benchmark, and at 4.05 years, is short the bogey's duration of 4.65 years. Given the historically tight spread between the 10-year Treasury and the anticipated core CPI rate of 3%, she is anticipating a sharp back-up in rates by the end of the year.
