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National City Plans To Overweight Mortgages

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National City Investment Management plans to add mortgage-backed securities if they cheapen substantially in the next few months.

Andrew Harding

National City Investment Management plans to add mortgage-backed securities if they cheapen substantially in the next few months. Andrew Harding, director of a $7 billion taxable fixed-income portfolio in Cleveland, said he will add $300 million of 15- and 30-year generic pass-throughs if they widen by 30 basis points over Treasuries. He expects mortgages will weaken versus Treasuries as the Federal Reserve begins to raise rates this summer. Harding said he will move up his MBS allocation from the current 2% underweight to 5% overweight in relation to Lehman Brothers Aggregate Bond Index. A decision on how to finance the MBS overweight has not yet been made. In corporates, the buy-sider is neutral allocation-wise and long duration. It is also underweight Treasuries and agencies. The remainder of the portfolio consists of 8% in asset-backed securities and 2% in commercial mortgage-backed securities.

Harding said he sticks to a yield curve barbell strategy because he expects the curve to flatten and stay so for some time. The portfolio is underweight in the two- to four-year maturities and overweight in cash equivalents and in the five-to-10-year maturities.

Harding noted he will unwind the yield curve barbell when the spread between the two-year and 10-year Treasury is less than 150bps. If the 10-year yield goes up to 5%, he said he will remain long on duration and still barbell the portfolio.

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