Putnam may also up its duration from short to neutral relative to its benchmarks once yields on the 10-year Treasury reach 4.5%, Bloemker said. While he declined to cite a duration for his portfolios, he forecasts that yields on the 10-year could reach that level within the next three to six months. The 10-year was at 4.19% on Dec. 8.
The manager began the move to CMBS earlier this year as spreads on corporate bonds tightened. "The alternatives are Treasuries, but we think triple-A assets are cheaper than Treasuries. If you look at single-A corporates, they're trading tighter than triple-A rated CMBS," Bloemker said. The CMBS he has purchased recently are a combination of new and secondary issues and total return index swaps.
Putnam has sold supranationals, foreign local governments and domestic banks in the corporate sector to finance its ongoing purchases of CMBS. It also recently sold off Fannie Mae and Freddie Mac agency debt due to tighter spreads.
Putnam's taxable fixed income portfolios are made up of 50% mortgage-backed securities, collateralized mortgage obligations, asset-backed securities and commercial mortgage-backed securities. Less than 10% of its holdings are in Treasuries, agencies make up less than 5% and the balance is in corporate credit.
The manager uses a number of benchmarks, including the Lehman Brothers Aggregate Bond Index and LIBOR. Compared to his bogeys, Bloemker is 10% underweight agencies and corporates and 20% overweight ABS and CMBS.