Cavanaugh Capital Management is in the market looking to add $26 million, or about 6% of its total portfolio, to mortgage-backed securities, using a combination of new cash and proceeds from the sale of U.S. Treasuries and agency debentures. Megan Brune, portfolio manager of $444 million in taxable bonds, says the firm wants to capture additional spread, and she sees an improving economy leading to higher Treasury yields and diminished prepayment risks for MBS.
To guard against extension risk, Cavanaugh will look to buy 15-year collateral as opposed to 30-year, and lower-coupon securities in the range of 3.5-5%. While the firm tends to buy pass-through securities, it may buy Planned Amortization Class bonds if they show better performance or less extension risk.
At a duration of 3.8 years, the Baltimore money manager is short its main benchmark, the 4.5-year Lehman Brothers Aggregate index. In its core portfolios, the firm allocates 36% to MBS, 31% to taxable municipals, 16% to agency debentures, 9% to corporates 6% to Treasuries and 2% to cash.
