Fifth/Third Investment Advisors, a $2.5 billion player in Grand Rapids, Mich., is seeking to add $40-50 million in mortgage-backed and high-grade corporate paper. Mitch Stapley, director of taxable fixed-income, says he will add 15-year current coupon MBS if option-adjusted spreads reach about 130 basis points over treasuries. Last Monday the spreads stood at 126 basis points over treasuries, and Stapley believes they will return to mid-May levels of 120 due to low prepayment risk.
Stapley believes the economy will bounce back in the 4Q, aided by tax cuts and a nascent recovery in Europe. One beneficiary will be the brokerage sector, which he says will benefit from an increase in stock market investments. He will seek to add brokerage firm paper such as the Lehman Brothers (A2/A) 77Ž8% of '10 and Merrill Lynch (Aa3/AA) 6% of '09, or issues of similar maturities if those are not available. He believes Merrill is less vulnerable to a downdraft in underwriting volumes than Goldman Sachs (A1/A+), and notes that Lehman's commitment to its fixed-income business has helped the credit. The Merrill paper traded at 112 over treasuries last Monday, and Stapley says he will always buy if it widens to 130-135 over.
Stapley likes Wells Fargo (Aa2/A+), which he believes "you should buy on weakness whenever you can," because it is a core holding that he believes can weather any downturn. The 6.45% of '11 were trading at 127 basis points over treasuries last Monday. They were at 115 over in mid-May, and Stapley says he will buy at 135 on the expectation that it will widen first and then tighten again and return to those levels. He also likes Delphi Automotive Systems (Baa2/BBB), a parts supplier which was hit hard last year due to its reliance on General Motors. Stapley believes Delphi will recover with the economy. The 6.5% of '09 traded at 170 over treasuries last Monday.
Stapley may also increase holdings of Ford Motor Company (A2/A) 7.45% of '31, Qwest Communications (Baa1/BBB+) 7.25% of '11 and Washington Mutual (A3/A-) 6 7/8% of '11, all of which were purchased recently. He bought the Qwest paper at 200 basis points over treasuries in mid-June and watched it narrow to 185 by the end of month. Though the money for those purchases came from 10- to 30-year U.S. treasuries and 10-year U.S. agencies (both Freddie Mac and Fannie Mae), he says additional purchases will come from cash.
Fifth/Third allocates 55% to investment-grade corporates, 20% to treasuries, 10% to agencies, 10% to MBS, and 5% to cash. At a duration of 5.5 years, it is neutral its benchmark. Lehman Brothers Government Credit index.
