Merrill Lynch Asset Management will be rotating $300 million from treasuries into MBS contingent upon favorable prepayment reports from the agencies, as well as possible interest-rate moves, says portfolio manager Christopher Ayoub.
Ayoub, manager of a $3 billion portfolio, wants to increase his MBS position by 10% but is still worried about refinancing waves hitting the higher coupon sector. He also believes the Federal Reserve still has more easing to do, even though his read on current economic data is that the Fed might not act until its May 15 meeting. Ayoub argues that the easing will take place at the May and June meetings, and will total 100 basis points. Assuming this occurs, Ayoub will look to buy into 15 and 30-year higher coupon pass-throughs. He also likes corporate bonds at these levels but will not increase what he considers his already "over-allocated" weighting of 40%.
The Plainsboro, N.J.-based firm has an asset allocation of 40% in corporates, 25% in treasuries, 15% in MBS, 10% in federal agencies and 10% in ABS. With a duration of 5.0 years, the portfolio is slightly longer its bogey, the Lehman Brothers aggregate whose duration is 4.60 years.
