Richard Litchfield, portfolio manager with Allmerica Asset Management, says the firm will rotate 5%, or $50 million, of its portfolio from mortgage-backed securities (MBS) into Treasuries if the Federal Reserve cuts rates by only 25 basis points this week, which is what he anticipates. Such a small cut by the Fed means the market will continue to demand another cut in September, leading to a second refinancing wave and causing mortgages to underperform.
Litchfield indicates that he is likely to sell Fannie Mae 7% 30-year pass-throughs. His choice for selling 30-year paper versus 15-years reflects the fact that 30-year bonds are the firm's biggest holding as well as the largest component of the firm's benchmark, theLehman Brothers aggregate index. In exchange, the firm will buy into the five- to 10-year part of the Treasury curve.
The Worcester, Mass.-based asset management firm has a $1 billion taxable fixed-income portfolio. The asset allocation for the fund is 40% MBS pass-throughs, 30% corporates, 19% Treasuries, 7% Agencies debentures, 3% ABS and 1% cash.
With a duration of 4.70-years, the fund is neutral to its Lehman Brothers aggregate benchmark.
