Swiss Re Investors, the New York investment arm of the giant Swiss insurer, has purchased about $1.5 billion in 15-year mortgage-backed securities over the past two weeks. Fixed-income chief Andre Moutenot, who helps manage the $13.5 billion total-return portfolio, says the trade was made as a result of the continuing pressure on the U.S. economy, particularly as reflected in declining U.S. corporate earnings. He says with defaults and downgrades continuing to increase at historically unprecedented levels, corporate bonds will remain problematic. Similarly, the sharp rate rally will allow the massive 6.5% and 7% coupon sectors (nearly 60% of the entire MBS universe) to become refinanceable. He says that the 15-year sector, or "dwarves" as they are known, have a less volatile rate of prepayments because of the higher amounts of equity built into the loan assumption.
The move was funded by selling equal parts 5-, 10- and 30-year agency debentures, as well as 30-year pass-throughs. Moutenot indicated that the move was ongoing, although he declined to specify at what levels he would add to his position.
Mountenot says the portfolio has been adding 5.50% and 6.50% bonds with 2.5 year average lives at an option-adjusted spread of 30 basis points over LIBOR. Both Fannie Mae and Freddie Mac bonds have been added, but he could not break out of which he had been buying more. He declined to specify an exit level.
The firm uses a proprietary internal benchmark that has a duration of approximately 5.9 years. The portfolio's duration is currently 6.1 years. The firm does not break out asset allocation, although Moutenot did say mortgages and agencies now constitute about 27% of the $13.5 billion portfolio, or $3.64 billion.
