Chubb Corp. will buy $300 million of agency planned amortization classes in the coming months. Paul Geyer, who manages a $4.5 billion structured portfolio out of Warren, N.J., said he would like to buy four- to six-year PACs comprising underlying 4%, 15-year and 4.5%, 30-year agencies. This buying would be financed with new cash, he emphasized.
Geyer explained that his interest in agency PACs is triggered by his belief that increasing the fund's exposure to the sector will control duration in these volatile rate markets. Geyer said his mantra has been to not underestimate volatility in the market and that, given recent employment data that showed the U.S. economy is recovering, the market was highly volatile at the end of last month and it could be volatile again in the coming months. These PACs, with the underlying collateral of 4%, 15-year and 4.5%, 30-year agencies, are attractive in these markets because "they have a better chance of not being busted than any other PACs," Geyer said. The yield on 10-year Treasuries has to fall to about 3% to break the PAC band, he explained. It was 4.21% on April 5.
Adding agency PACs is a way of maintaining a duration-neutral position in relation to the portfolio's benchmark, which is derived from the Lehman Brothers Mortgage Index, clarified Geyer. The duration of the synthetic index is four years.
Of the structured portfolio, about $1 billion is invested in commercial mortgage-backed securities, $350 million is in CMBS PAC interest-only securities and another $2.25 billion is held in pass-throughs
