After selling $70 million in mortgage pass-throughs to buy five and 10-year Treasuries six weeks ago, the United Bank of Kuwait Asset Management is considering reversing the trade and selling Treasury paper to beef up its MBS exposure by $40 million. Mortgage pass-throughs have cheapened as investors have become worried about prepayments, says Robert Friend, portfolio manager of $1 billion worth of taxable fixed income in London. He adds MBS is lagging behind 5- and 10-year swap spreads and represents an historically good value. The yield curve manager is 5% long its duration relative to the J.P. Morgan Global Bond Index, which has a duration of 5.8 years. Friend is slightly bearish and will neutralize the duration once Treasuries trade up about 5 basis points, giving the 10-year a yield of 5.06%. "We need discipline, because if yields back up because the market gets ahead of the economy, we don't want to have to give back all the profits we've made off of being long," says Friend. Seventy-five percent of the portfolio consists of government paper, including Canada, Australia, Japan and Europe, with 20% in U.S. agencies and the remaining 5% in investment grade corporates.
United Bank of Kuwait Considers MBS, Selling Treasuries
