According to Jeff Given, fund manager at John Hancock Advisors, the money-management arm of Boston-based John Hancock Financial Services, value is to be found in agencies. In these volatile times, they will retain that value going forward.
Given is responsible for managing the mortgage-backed, asset-backed and commercial mortgage-backed portions of a $5 billion portfolio, as well as the company's entire agency debenture market.
Following products that are consistent with the swap market, Given currently says agencies are where the value is at. "So part of what offers value depends on your outlook for Treasury rates," he said. "So if you think Treasury rates are going to back up, negative convexity looks pretty attractive here."
Currently, agency MBS makes up the largest sector of his portion of the portfolio, which has fluctuating sectors based on the portfolio manager's viewpoints. "It will all depend on the portfolio manager who runs the entire group whether his outlook is corporates versus mortgages versus high yields," he added.
Given, though, is currently looking into adding more CMBS - currently the second largest sector of his portion of the portfolio - which he feels have pretty good value. Going forward, he sees a further steepening of the Treasury yield curve, which could help CMBS in the long run. However, this depends almost totally on the actions of the Federal Reserve.
"I think in a steepening environment you'll see swap spreads tighten in, and that will bode well for CMBS, agency passthroughs, and agency debentures," he said, with no one particular sector being affected more. "I think CMBS is probably a little bit cheaper than the other two products and that CMBS is one of the better plays in that type of environment, and how long that continues or if it does happen depends on Fed actions."
He noted that while indicators are pointing to a slowing economy, "All it will take is one month of stronger numbers and the Fed's back in the picture ... which wouldn't bode well for any of the product."
As for the agency market, Given still believes that value lies within Ginnie Mae. "I know a lot of people think the pay-up is way overdone, but if you look at the supply technicals in the Ginnie Maes, combined with the fact of the GSE hearings that are going on and Ginnie Maes are explicitly guaranteed by the government, so that should offer some value. Throw on top of that ... the Home Loan Banks purchasing FHA collateral, so diminishing supply of Ginnie Maes in that environment."
He added that there is only a "limited downside" to Ginnie Maes versus conventionals at this point.
Hancock Online? Not Likely.
With the fixed-income market making the foray into online trading, Given said that John Hancock has no plans to offer online securities trading, and doesn't believe it's very possible.
"Especially in trading passthroughs, in which people have certain stipulations on what can be delivered in," he said of the issue. "And I'm just not sure how they'll electronically trade all the different stipulations that could possibly be put in: be it the weighted average loan age, or the number of pools delivered in. I'm not sure how easy it will be to get any passthroughs of any substantial size traded through an electronic trading means."
If any trading were to be put online, Given says CMBS secondaries and collateralized mortgage obligations could easily be traded to cut off the middleman. "But I still don't see it becoming as active as the Treasury market is."
