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Citi To Add 15-Year Mortgages

Citigroup Asset Management will add a few percentage points to its allocation in 15-year mortgage pass-throughs as part of its $2 billion Treasury and mortgage-backed bond portfolio.

Fran Mustaro

Citigroup Asset Management will add a few percentage points to its allocation in 15-year mortgage pass-throughs as part of its $2 billion Treasury and mortgage-backed bond portfolio. Fran Mustaro, portfolio manager, declined to specify how much he currently holds in 15-year pass-throughs. But he said he is looking to add to his weighting now because the bonds offer more yield and have underperformed their 30-year cousins as asset managers barbell investments in a curve-flattening environment. While 15-years are not screamingly cheap, they currently offer some relative value, he noted. "Most of the time relative value investors only get 2/32s to 4/32s of deviations in price relationships," Mustaro said, declining to specify how much he would add. He manages his portfolio from New York. To finance the move, Mustaro has sold off almost all his holdings in longer-dated collateralized mortgage obligations with an average life of 18 years backed by Ginnie Mae 5%s, as well as some of his holdings of 10-year Treasuries. "The fuller coupon Ginnie Mae market right now is a little fully valued because it's been bid up fairly high by foreign investors and people divesting out of Fannie Mae and Freddie Mac. Also, the full-coupon Ginnie Mae's tend to be subject to higher prepayment speeds," Mustaro said. The manager said he will maintain his overweight to mortgages.

Mustaro is overweight hybrid adjustable-rate mortgages with a fixed coupon for five or seven years and a floating rate for the remainder of the life of the bond. The manager declined to specify the range of coupons he holds.

Mustaro's portfolio is composed of 50% Treasuries and about 50% mortgages. He is underweight Treasuries and overweight mortgages. His bogey is the Citigroup Treasury/Mortgage Index. The manager is close to his benchmark's duration of 3.7 years.

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