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Baltimore Investor Focuses On Taxable Munis, MBS

Cavanaugh Capital Management is increasing duration and putting new cash into taxable municipals and mortgage-backed securities as it awaits higher interest rates.

Megan Brune

Cavanaugh Capital Management is increasing duration and putting new cash into taxable municipals and mortgage-backed securities as it awaits higher interest rates. Megan Brune, who helps manage roughly $720 million in total fixed-income assets from Baltimore, said she will gradually increase the duration of the $148 million core composite portfolio. The duration had been shortened to roughly 75% of the Lehman Brothers Aggregate Bond Index, which is 4.33 years, and will slowly be lengthened to 80% of the index with a continued defensive stance. Brune said that if the 10-year Treasury yields from 5.25% to 5.5% after the Federal Reserve's next action, the fund will adopt this slightly more neutral stance relative to the benchmark in anticipation that yields would remain in that range for a while and making it less advantageous to be much shorter than the index. The 10-year was at 4.77% last Monday.

The core composite portfolio holds 40% in mortgage-backed securities, which includes Ginnie Mae, Fannie Mae and Freddie Mae, 29% in taxable munis, 11% in agencies, 9% in corporates, 3% in cash, and the rest in accrued interest and other instruments. Brune said that new cash in going into high quality triple-A, credit-enhanced taxable munis because the yield is similar to single-A or double-A corporates. She also said taxable munis are a good diversifier for the portfolio and adds that they are becoming more popular among investors. Within mortgages, Brune prefers 10- and 15-year maturities, which she said prevents extension risk.

The portfolio is short corporates because Brune said there is more value in other asset classes, although she will buy clean double-A corporates on occasion. She may consider increasing Treasuries because the portfolio is short right now, although she noted that any addition would be minor. In the meantime, Brune said she is waiting for the market to settle after it backed up in the first week of May.

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