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North Dakota Manager To Bulk Up In ARMS

Greg Sweeney, portfolio manager at Northern Trust Management, says he will add $15 million, or 5% of the firm's portfolio, to short-term adjustable-rate mortgage-backed securities. He will finance the purchases with new money coming from bond redemptions. He says he is making the move to collect more yield while staying on the shorter end of the curve, a strategy that limits loss of principal. He says he is positioning his portfolio for the next 12-18 months for a backup in rates. He reasons that the Treasury rally is bound to end once the economy begins to recover.

Sweeney will buy Fannie Mae and Freddie Mac ARMs with a one-year average life and a coupon in the 3-3.25% range. In buying those securities, he can lock in an incremental 25 basis point yield compared to a five-year Treasury, while keeping the term of the investment much shorter. If interest rates go up, he will not lose as much in principal because of the relatively short term of his investment. In addition, the shorter duration provides him with less volatility.

Sweeney manages a $300 million portfolio out of Fargo, N.D. He allocates 70% to corporates, 10% to adjustable-rate mortgage passthrough, 10% to agencies and 10% to Treasuries. With a 3.25-year duration, the fund is shorter than its 5.10-year bogey, the Lehman Brothers government/credit index.

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