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Schroder Invests In Middle Of Curve As Yields Flatten

Schroder Investment Management North America has been selling off 30-year Treasuries and adding to its holdings of five-year Treasuries because it does not see any major yield curve flattening in the short term, according to David Harris, director and U.S. fixed income fund manager.

David Harris

Schroder Investment Management North America has been selling off 30-year Treasuries and adding to its holdings of five-year Treasuries because it does not see any major yield curve flattening in the short term, according to David Harris, director and U.S. fixed income fund manager. Harris manages $7.3 billion invested in sectors including mortgage-backed securities, asset-backed securities, Treasuries, agencies and corporates. Harris recently cut back his holdings of 30-year Treasuries, going from 4/10 of a year to 1/10 of a year overweight. "Selling off 30-year Treasuries was a tactical reduction in exposure given that we didn't see any events during the month that would cause significant further flattening of the yield curve," he said.

The manager has also added to his position in five-year Treasuries, going from a 4/10 of a year underweight to being almost neutral.

Despite continuing richness in the mortgage market, Harris has also brought his holdings of mortgage-backed securities from 1/10 of a year short of the benchmark to neutral. "We expect volatility to remain low and rather than own Treasuries, we prefer to pick up extra yield in mortgages," he said.

Harris uses the Lehman Brothers Aggregate Bond Index as his portfolios' main benchmark. He prefers to evaluate the different sectors within the portfolios in terms of duration. The firm is overweight commercial mortgages and asset-backed securities by 2/10 of a year and corporate credits by 1/4 of a year. Schroders is underweight two-year Treasuries by 4/10 of a year. Agencies have remained stable, with a 3/20 year contribution to duration.

Harris seemed confident that the Federal Reserve will continue to raise rates. "Even if there is a large deviation ­ a very strong or very weak number ­ [the payroll figures] are one number away from a trend of adding jobs. That's not enough to derail what the Fed needs to do," he said.

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