D.B. Fitzpatrick will be shortening the overall portfolio duration to index neutral by quarter-end, on the view that the effect of further interest rate cuts will be confined to the shorter end of the curve, says Brian McGrath, portfolio manager at the Boise, Idaho-based investment firm. McGrath, who manages a $200 million Treasuries and agency portfolio, will not change his current allocation, but move instead from intermediate range to short term.
On the treasuries side, McGrath is swapping $50 million seven-10 year treasuries into the two-to five year sector on the view that this area will benefit from what he is anticipating will be at least an additional two Federal Reserve rate cuts.
On the agency side, the shortening strategy consists of rotating approximately $22 million 6.5% 30-year Ginnie Mae notes into lower coupon (5.5% to 6%), 15-year Freddie Mac and Fannie Mae "dwarf" or "nugget" bonds. He reasons that rotating into conventionals affords him a greater choice of shorter maturity paper than Ginnies. He also views his treasury position as a natural hedge against the prepay risk associated with callable mortgage paper.
The $200 million portfolio has an asset allocation of 75% agency MBS and 25% treasuries. At a 4.84 year duration, the portfolio is slightly longer its bogey, the Lehman Brothers aggregate, whose duration is 4.60 years.
