Thrivent Financial for Lutherans is looking to buy $20 million in mortgage-backed securities, a move that will be financed through the sale of Treasuries. Steve Lee, portfolio manager of a $1 billion dollar fixed-income fund in Minneapolis, says he plans to increase his MBS holdings to 32%, because mortgages are relatively more attractive than Treasuries in what he expects will be a rising-rate environment. Treasuries will be reduced from 5% to 3%. The fund would buy three- to five-year MBS and sell comparable Treasuries, Lee points out.
Lee notes the move is not a wholesale shift and says he does not expect interest rates to increase dramatically and cause a flutter in the bond market. "That is my expectation. The economy is recovering but not adding jobs. So, the [Federal Reserve] will be patient," he says.
That being said, Lee remains bullish on the corporate side and expects to maintain the fund's overweight in high-yield and triple-B assets throughout the year. He stresses that the MBS increase would be funded by the sale of Treasuries and not from the sale of triple-B or other high-yield assets. The remainder of the fund is 45% invested in investment-grade bonds, 5% in high-yield assets, 5% in agencies and 5% in commercial mortgage-backed securities. The balance is in cash.
The fund follows an in-house customized benchmark and, according to Lee, it is closely aligned to it. The fund has occasionally outperformed the benchmark, he adds. The duration of the fund and the benchmark is 4.5 years.