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Penn Shop Swaps Out Of Govvies

McGlinn Capital Management will rotate 7% of its portfolio, or $91 million, from Treasuries into an evenly-weighted allocation of corporate and mortgage bonds. J.P. Weaver, portfolio manager, says he is waiting for pass-through spreads to widen by an additional 10 basis points versus Treasuries before buying the mortgage bonds. Last Monday, the 6% Freddie Mac pass-through traded at 152 basis points off the 10-year curve. He has already begun the corporate move. To finance the trade, Weaver will sell the short and intermediate part of the Treasury curve, on the view that Treasury yields are at their lowest levels in 10 years, especially on the shorter end of the curve. He remains bullish on long-term Treasuries, anticipating the curve will steepen.

Weaver will look into the current coupon 5.50% Fannie and pass-throughs, which he argues are better protected against negative convexity. His rationale is that high refinancing levels and the added supply from mortgage originators should allow option-adjusted spreads to widen even further.

Weaver wants to add corporates to his portfolio, based on a recovery scenario for the economy. He says the firm likes the industrial and utilities sectors, which are likely to benefit from a recovery first. As an example, Weaver says he bought the newly issued Boeing Capital Corp. 5.75% notes of '07 (A2/AA-) at a 220 basis point spread over five-year Treasuries. He compares this to the levels on some of Boeing's secondary paper, currently trading at a 150 basis point spread. Last Monday, the Boeing 5.75% notes were trading at 175 basis points over the curve.

The Wyomissing, Pa.-based firm has a $1.3 billion portfolio with an asset allocation of 30% Treasuries, 30% mortgage pass-through, 26% corporate and 14% agency debentures. With a 4.50-year duration, the fund is slightly longer than its index, the Lehman Brothers aggregate, which has a 4.20-year duration.

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