M.D. Sass Investor Services is looking to buy up to $40 million in short collateralized mortgage obligations and will increase its overall allocation to CMOs as part of the move. The shift is based on its view that these bonds are attractive given the Federal Reserve's indication that short-term interest rates will remain stable. Dominic Bruno, senior v.p. and manager of $2 billion in taxable fixed income at the New York-based manager, argues that Fed's intentions to leave rates stable bodes well for short-term mortgage-backed securities. Specifically, M.D. Sass plans to raise its CMO exposure to 25%, from 23%. Bruno says he also plans to buy mortgage pools that feature a 10-year legal final maturity because he says they provide good protection against extension risk. "No matter how slow prepayments get, they are unable to extend beyond 10 years," he explains. This will raise the portfolio's MBS allocation from 37% to 38%.
To finance the move, Bruno plans to sell Treasuries outright and move some T-bill assets into callable agencies. Bruno expects this to reduce his government bond allocation to 20%, from 27%, and bolster his agency allocation to 16% from 13%. Callable agencies, he says, have lagged the good performance in other sectors. The portfolio uses the Lehman Brothers Aggregate Index as its benchmark and the rest is in cash.
The portfolio doesn't hold corporate bonds and its average duration is 4.3 years. Bruno says he prefers to make the moves on a duration-neutral basis, but may raise the portfolio's average duration early next year.
