Greg Hosbein, portfolio manager with Segall, Bryant & Hamill, says he is swapping 3% of the firm's portfolio, or $33 million, out of Treasuries into conventional Fannie Mae and Freddie Mac 30-year pass-throughs. He is making the move on the view that spreads on mortgage bonds are widening to attractive levels, and because he sees the Treasury rally potentially ending soon.
The trigger for this reallocation will be another 10-15 basis points of widening for the current coupon 6% and 6.50% pass-throughs, currently trading 200-225 basis points off Treasuries, says Hosbein. Five- to 10-year Treasuries will be sold to finance the move since Hosbein says they are the most expensive on the curve. He says the firm gives preference to newly issued bonds, as opposed to seasoned collateral, because of the additional yield pick-up offered.
Hosbein manages a $1.1 billion portfolio with an asset allocation of 37% corporates, 33% mortgage pass-throughs, 15% Treasuries, 10% agencies and 5% ABS.
With a 4.74-year duration, the fund is slightly longer its benchmark, the Lehman Brothers aggregate index which has a duration of 4.52-years.