David Petrosinelli, portfolio manager at Chicago-based Shay Assets Management, says the firm will reduce interest rate risk by allocating more to faster resetting securities in a move destined to reposition its $3.7 billion adjustable rate mortgage portfolio as it believes interest rates are about to rise. He reasons that in a rising interest rate environment, bonds that reset to a coupon in line with market rates perform better.
Petrosinelli plans on following this strategy in two ways. First, by swapping 3%, or $111 million, out of Ginnie Mae ARMs into Fannie Mae and Freddie Mac ARMs because Freddie and Fannies have a faster reset (four to six month's interval) than Ginnies, which only reset once a year. He will also rotate 8%, or $296 million, of the firm's portfolio out of fixed-rate collateralized mortgage obligations into an equal amount of cash and floating rate CMOs.
Petrosinelli allocates 25% to private labels ARMs, 15% to cash, 14% to Fannie Mae ARMs, 14% to Freddie Mac ARMs, 14% to fixed-rate CMOs, 13% to floating CMOs and 5% to Ginnie Mae ARMs. The average duration is nine months. The firm uses the six-month Treasury bill as its benchmark.