Strong Capital Management is considering selling up to $600 million in mortgage-backed securities following the recent employment data that makes it less likely the Federal Reserve will raise interest rates soon. Thomas Sontag, who manages around $4 billion in fixed income through various funds, says he may reduce exposure to the entire MBS sector if spreads tighten by 10-15 basis points across the board over the coming months. He says the sales would make sense based on valuation. He would reallocate the proceeds and be a more aggressive buyer of investment-grade corporates. Sontag declined to name specific securities he is considering buying or selling.
Overall, Sontag says he could reduce MBS from more than 50% of the $4 billion fund to 35%, which would pare the MBS position from overweight in relation to the Lehman Brothers Aggregate Bond Index to a neutral weighting. On the flip side, he says Strong, based in Menomonee Falls, Wisc., would add corporate bonds if spreads widen by 10-15 basis points in the next few months. He would move to overweight from neutral to the sector, but declined to be more specific.
Sontag had been considering increasing his MBS holdings from its present more than $2 billion to $3.1 billion, to raise it to 60% of assets, before the employment figures. He explains that the disappointing employment data makes MBS riskier though they remain attractive and fairly valued. He says the market had expected the report would show around 140,000 new jobs were added, when in fact it came in at a mere 21,000. This helped lower yields on Treasuries and lead to an increase in prepayment risk for mortgage-backeds. The remainder of the fund's assets are held in Treasuries and agencies.