Montgomery Asset Management will rotate from Treasuries into mortgage passthroughs for an additional 5% of its portfolio, or $155 million, says Thomas O'Connor, portfolio manager of the Walnut Creek, Calif.-based asset management firm. O'Connor says that he has already rotated 10% of the overall portfolio, or $310 million, by putting on this trade.
O'Connor adds that the firm's rotation is guided by two main motivations. First, the Federal Reserve's easing has made the yield pick-up in mortgages more than adequate to compensate for prepayment risk. A second factor is that high levels of implied volatility in the market should come down by year-end, due to an increased issuance of callable agencies.
O'Connor says he has been trying to buy 15-year Fannie Mae seasoned mortgage pass-through as well as Alternative A 30-year premium pass-throughs. Alternative A securities are agency-backed securities with a slower prepayment record than generic mortgages because they are issued to lower-income homeowners.
O'Connor manages a $3.1 billion portfolio whose asset allocation is 40% MBS pass-throughs, 30% corporates, 26% Treasuries and 4% agency debentures. With a 4.60-year duration, the fund is practically neutral to its index, the Lehman Brothers aggregate, whose duration is currently 4.67-years.
