American United Life has been putting new cash flows to work in heavily structured CMOs to get the duration they need to meet their asset and liability needs, according to portfolio manager Kent Adams in Indianapolis. Adams, who oversees the firms $4.7 billion fixed-income account for its insurance company parent, particularly likes NAS (non-accelerated senior) bonds, especially the AA tranches, for their stable prepayment and extension characteristics. This paper is crafted from whole-loan Jumbo (mortgages issued in amounts greater than $272,000) CMOs and Adams says that he is drawn to it because of the attractive spread levels they offer, usually 170-200 basis points off the curve. Moreover, Adams says that with some seasoning, these bonds can often receive ratings upgrades, and tighten a further 25 basis points. Adams also has been buying RELO bonds, or CMOs carved from mortgages issued to people who relocate frequently. While he acknowledges that the prepayment speeds are high, they are consistently stable and the bonds pose little threat of extension risk. Adams has been buying them at up to 200 basis points off the curve.
The fund has an asset allocation of 39% corporates, 33% privately placed corporates and 28% MBS (primarily CMOs). The fund has a duration of 4.6 years, neutral to its internal benchmark.
