Wright Investors Service is trimming its allocation to high-grade corporates in favor of whole loan hybrid mortgage-backed securities, on the view that corporates are fairly to richly valued and non-traditional mortgages offer incremental yield and stable maturities.
Anthony van Daalen, senior v.p. and head of $1.25 billion in taxable fixed income in Milford, Conn., said despite the move, the outlook for corporate credit remains positive. "The fundamental underpinnings for corporates are attractive and issuance seems to be contained, but spreads are toward the tighter end of their trading range," he said. He said certain sectors, such as industrials, are richer than others but stressed that any selling of investment-grade corporates would be done on a name-by-name basis. On the flip side, he said hybrid MBS are attractive as triple-A securities with relatively low negative convexity compared to traditional 30-year agency MBS.
Specifically, Wright is reducing corporates from roughly a 7% overweight to 4%. Van Daalen said it is difficult to quantify the move since Wright runs money in different accounts for different styles. The most-common benchmark it runs money against is the Lehman Brothers Aggregate Bond Index; it also measures performance against the Lehman Government/Credit and the Lehman Intermediate Government/Credit indices.
In duration, Wright recently moved from neutral to short on expectations that despite weak payroll figures, the U.S. economy is heating up. The portfolio is currently about half a year short. "We think there are still a whole host of arguments that indicate interest rates do need to rise; we've become more defensive," van Daalen said. He added: "Duration is like Tabasco sauce, you don't need a lot of it to have an effect."