Banking on the Federal Reserve cutting rates another 50 basis points in the short term,BNY Asset Management has been selling longer maturity treasury notes in favor of MBS, and possibly corporates further down the track. Margo Cook, who heads up the firm's $5 billion institutional fixed income division, says her most recent move was to sell long-term treasuries in favor of Ginnie Mae 7%s. "We've been moving more into 7%s and 7.5%s, because they've been beaten up by worries over refinancing, and we think those spreads will tighten."
Cook would not discuss the size of the allocation shift, but says that her portfolio shifts come in 1-1.5% increments, or $50-75 million.
Cook feels strongly that treasuries are overvalued in the current climate. "Now you have to reach to get a five percent yield in the treasury market." She says she agrees with Alan Greenspan's view that it takes several months for the economy to respond to interest rate cuts. She is betting that a stock market recovery will lead to increased consumer confidence and spending, and ultimately, higher GDP growth.
Already underweight in treasuries and overweight in corporates, Cook isn't ready to trade out of the troubled telecom and energy sectors. Though she was concerned by the recent bankruptcy of Pacific Gas and Electric Co., she feels companies such as Enron (Baa1/BBB+), that both trade and produce energy, are better hedged against any such risks. She will watch her investment in Calpine Corp. (Ba1/BB+) more closely, since it sold power to PG&E and is owed some $300 million.
Cook currently allocates some 34% to corporates, 25% each to treasuries and mortgages, 11% to agencies, and 4.5% to agency notes. The portfolio is slightly short of its benchmark, the 4.57 year Lehman Brothers aggregate.
