Value Line Investment Management is buying the newly issued subordinated 10-year Fannie Mae (Aa2AA) and Freddie Mac (Aa2/AA) bonds on the view that their recent spread-widening was overdone. Bruce Alston, portfolio manager in New York, stocked up on the subordinated debentures from the GSEs at 33 basis points off the 10-year Treasury bond, reckoning he would reverse the trade at 20 basis points. He declined to reveal the amounts. Another program he recently executed was buying 6% conventional pass-throughs for yield-enhancement purposes, as they were trading at the $99 level. This brought his mortgage allocation up to 35% from 33%, a move of $18 million.
Although the firm has been reducing fixed-income exposure from $1.5 billion to $900 million, largely based on its proprietary research model recommending an aggressive overweight in equities, he has not rotated out of his Fannie Mae delegated underwriting services bonds (Aaa/AAA). He argues that the extensive prepayment protection, credit safety and above-market yields make these a core holding. He owns the 6.83% of '03s, the 6% of '08s, the 6.45% of '08 and the 7% of '06s.
The fund has an asset allocation of 40% agency, 35% MBS, 15% U.S. Treasuries and 10% cash. Alston uses the 5.50-year Lehman Brothers government/corporate index as a benchmark, noting that his fund has a duration of 90% of this bogey, or 5.0 years, currently. He says this short is due to his belief that the front end of the treasury market is fully priced, and offers historically weak real rates versus a CPI prediction of 3.5%.
