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Northern Trust To Pump Up MBS

Northern Trust is looking to add up to $25 million in mortgage-backed securities over the next month.

Matthew Toms

Northern Trust is looking to add up to $25 million in mortgage-backed securities over the next month. Matthew Toms, portfolio manager of $500 million invested in long-duration government bonds from Chicago, said he would add up to 5% to his MBS position should spreads to Treasuries widen by three to five basis points. "We've seen some recent backups in mortgage spreads, although from very tight levels," Toms explained. The manager said he would finance the move by selling five-year Treasuries. Toms said he may also add to his barbelled strategy by adding 3-5% to his holdings of Treasuries 20-years and longer, selling 10-year Treasuries to finance the move. The manager said he will make the change if the twos/10s spread falls to 70bps, which could happen in the next one to two months, he said. The spread was at 80bps on March 14.

Toms' benchmark is the Lehman Brothers U.S. Treasury Index. The manager is overweight mortgages by 15% against the index. Within mortgages, he has focused on 15-year and longer Fannie Mae and Freddie Mac pass-throughs with 5.5-6% coupons. "We're not as much a player in Ginnie Mae because there is still a spread premium to move out of those mortgages," he said.

Despite rising interest rates, Toms is not overly concerned with the prospect of extension risk. "We think it's going to be more gradual unless the 10-year Treasury spikes above 5%," he said.

Toms is 15% overweight agencies and 30% underweight Treasuries. The manager is long his index at 5.45 years versus the benchmark's 5.28 years.

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