Greg Hosbein, portfolio manager with Chicago-based Segall, Bryant & Hamill, is going to swap 5%, or $50 million of the firm's $1 billion portfolio, out of corporates into agency pass-throughs, on the view that mortgage spreads will come in over the next few months. He reasons that pass-throughs will benefit directly from a decline in interest rate volatility as the Federal Reserve is likely to keep rates unchanged, until at least until September. He notes that 30-year Fannie Mae 6.50% bonds were yielding 190 basis points over the Treasury curve last Monday, a level he sees tightening by 10-20 basis points over the next few months.
Hosbein says he will buy Fannie Mae and Freddie Mac 30-year conventional bonds, with a preference for newly issued bonds versus seasoned ones, as seasoned mortgage bonds trade at a slight premium in the current pre-pay environment, while newly issued bonds offer more yield. Preference will be given to 30-year over 15-year bonds as Hosbein anticipates the yield curve will flatten. He says purchases will be funded through profit taking in some corporates. A recent example was the sale of the First Data Corp. 4.70% notes of '06 (A1/A+). The bonds were sold because the supermarket sector has been well bid recently, says Hosbein. Most of the sales will be in the five-year maturity range in order to keep some yield, though he will ponder selling some 30-year corporate paper to remain duration neutral.
The portfolio's asset allocation is 37% corporates, 33% agency pass-throughs, 13% agency debentures, 10% Treasuries, 5% ABS and 2% cash. With a 4.57-year duration, the fund is slightly long its index, the Lehman Brothers aggregate which has a duration of 4.47 years.