Investor Scouts Out Hybrid ARMs

Jon Denfeld

Shay Assets Management may add to its AMF Adjustable-Rate Mortgage Fund's holdings of front-end sequentials of hybrid adjustable-rate mortgages. The asset manager is considering the move now as the flattening yield curve allows it to pick up higher yield in the sequentials, which are the first 12-18 months of cash flows from hybrid ARMs, without adding too much duration, said Jon Denfeld, portfolio manager and part of a Chicago-based team that acts as advisor to the $3 billion fund.

The majority of the fund is composed of ARMs, with 39% in mortgages that reset off LIBOR, 29% in mortgages with constant-maturity Treasury-linked rates and 4% in mortgages that reset off the cost of funds index. The rest is composed of 23% in fixed-rate mortgages and 5% in cash. Overall, the fund may add $90 million of the hybrid ARMs.

Within the 29% invested in mortgages that reset off one-year CMT, Denfeld plans to add a few percentage points to its holdings of front-end sequentials. The portfolio manager will fund the move using new cash and sales of money market collateralized mortgage obligations. He declined to quantify how much of his CMO holdings he would sell.

About 52% of the fund is backed by mortgages issued by agencies, while 43% is backed by triple-A private label mortgages. The fund's duration is 0.7 years and its bogey is the six-month Treasury bill.