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Lord Abbett Plots MBS Overweight

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Lord Abbett & Co. may add up to $300 million in mortgage-backed securities.

Zane Brown

Lord Abbett & Co. may add up to $300 million in mortgage-backed securities. The fund manager will overweight the sector by 10-20% in its $1.5 billion investment-grade total return portfolio if spreads widen an additional 10-20 basis points, said Zane Brown, partner and director of fixed-income investments in Jersey City, N.J. Lord Abbett's total return fund is run against the Lehman Brothers Aggregate Bond Index and is currently market weight in MBS. Brown has pared its agency allocation and added MBS as spreads have widened 20bps since March. He explained opportunity in the agency sector has diminished as the view government-sponsored enterprise (GSE) regulation will improve credit quality has become more popular. Conversely, MBS spreads have been put under pressure--which Brown expects to continue--as the market anticipates the Senate will force the GSEs to unload some of their enormous MBS portfolios. Lord Abbett is currently underweight agencies with a 12-13% allocation.

Lord Abbett is also overweighting commercial mortgage-backed securities by almost 20% at the expense of its corporate allocation in an attempt to pick up some extra yield.

The manager is underweight corporate bonds with a 15-18% allocation and Brown estimates the strategy is yielding an additional 15-20bps without sacrificing credit quality. Brown explained spreads are too tight in the corporate space, particularly given his concern about equity-friendly and bondholder-unfriendly behavior.

Brown said the total return fund does not take duration risk and has a minimal allocation to Treasuries. "There's not a lot of money to be made on owning the 10-year," he stated, noting he expects the yield on the 10-year Treasury will rise to 4 3/4% by year-end by which time he expects the Federal Reserve to raise the Fed Funds rate to 3 3/4%.

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