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Chicago PM Turns To Corp. Sale For Higher Coupon MBS

Segall, Bryant & Hamill will look to sell corporate bonds while increasing its mortgage-backed securities allocation by about $60 million to move up in coupon. Jim Dadura, portfolio manager of $1.2 billion in taxable fixed-income, says the firm will start looking at 6.5-7% coupons in 30-year Fannie Mae and Freddie Mac bonds and 6-6.5% coupons in 15-year pass-throughs, probably after the Federal Reserve's first interest-rate hike. The firm will make the move in anticipation of an eventual decline in the rate of prepayments. Dadura says he expects the Fed's first move to occur late this fall, and he believes a 50 basis point hike is the most that will occur by year-end.

To raise money for the purchase, the firm will look to sell some of its corporate bonds that have traded at an unusually tight spread to Treasuries in what has been a bifurcated corporate bond market in terms of credit performance. Examples of bonds he will look to sell include the Lowes 7.5% notes of '05 (A3/A), which were 55 basis points off the Treasury curve on June 28, and the Conoco Corp. 6.35% notes of '11(Ba1/BBB+), which were bid at 100 basis points over 10-year Treasuries.

With a duration of 4.4 years, the Chicago-based money manager is slightly long one of its main benchmarks, the 4.31-year Lehman Brothers aggregate index. It allocates 37% to corporates, 35% to MBS, 10% to agencies, 10% to Treasuries, 6% to asset-backed securities and 2% to cash.

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