Investors Management Group will add some $350 million to its mortgage-backed portfolio to take advantage of expected spread compression as Treasury rates rise with an improving economy. Jeff Lorenzen, cio overseeing more than $3.5 billion in mostly taxable fixed income, says he believes there is enough fiscal and monetary stimulus in the system to support a recovery. However, he says a sharp move in the front end of the curve is still nine to 12 months away as the Federal Reserve will give the economy time to reignite before raising interest rates. IMG will wait 30 to 60 days before investing in order to allow the refinancing wave to cool off and to get a better sense of what prepayment speeds are likely to be going forward.
The firm will look to buy premium coupon pass through securities such as 5.5% and 6% with 15-year collateral, in order to get the best possible returns while minimizing extension risk. It will use pay-downs from its asset-backed and collateralized mortgage obligation portfolios to finance the purchases. Because ABS and CMOs have a shorter average life than other securities, they can pay off fairly quickly, Lorenzen says.
At a duration of 3.60 years, the Des Moines, Iowa money manager is 14% short its bogey, the Lehman Brothers aggregate index. It allocates 32% to corporates, 30% to MBS, 17% to ABS, 14% to a combination of Treasuries and agency debentures, 5% to taxable municipals and 2% to cash.
