Jason Stipp: So looking to the other side then, where you do see opportunity now, you folks don't try to mimic an index, you go to where you see the value. I'm wondering after a year that we've had, from the depths of the downturn and then now we've had a big upturn, where are you finding opportunity in the market then?
Thomas Atteberry: We still find opportunities. On the high-quality side, there are two places we still find some opportunities, not tremendous, but it's still some. One is to look at what has been quoted by someone to me as the "Bordeaux" of agency mortgages, things that were issued in 2003 and earlier, where you had quality underwriting standards, where you had loan to values of 80% or less. And you have a borrower who has shown you the ability to survive through a rough time.
In the case of a 15-year mortgage, someone who in nine years roughly is going to own the home. We find that area of the mortgage market still very attractive. We've gone into the agency debenture market specifically for a step up note, which is a bond whose coupon will increase every year. Say it's 2% the first year, then 2.75%, 3.5%, 4.5%, as an example. We see that as something that is attractive, those who give us returns in a low end 2%, high end 3.25%, 3.50%.
We do see an occasional opportunity in high yield. There's not as many of them. We do see the occasional opportunity in investment grade, and we exploit them when we find them. But those are more one off. You can't make a blanket statement, "Oh, all corporates are inexpensive," or "Oh, all high yield is inexpensive." That part has gone. It's now very much finding one-off opportunities.
Stipp: Back to the fundamentals.
Atteberry: Always back to the fundamentals.
Stipp: So on the flipside, one area where you've steered clear is Treasuries. You touched on this in a question earlier, but what is the fact that you steered completely clear of Treasuries, which some people, as you said, the flight to safety--everyone piled into treasuries as safe investments. As a fund that's known as being as risk conscious as you are, to stay away from Treasuries, what does that say?
Atteberry: Two-fold thing. First off, you realize that there has been some manipulation of the rate in the fact that the Federal Reserve Bank has purchased Treasuries in order to keep a rate decline. You also realize that they are in an extended period of time, which they said there is going to be zero for short-term interest rates, and they said that's an extended model.
Fundamentally, you look at the yield of a two-year or five-year or 10-year, you just make very simple assumptions that says, well, what if interest rates rise 100 basis points in a year? Not an unusual event. It happens. A change of 100 basis points happens all the time. But we will just pick, it goes up by 100.
So at two year, roughly say it goes from 1% to 2% in one year in its yield, and you sell the security. What did I make? And you're looking at an equation where you make about 10 basis points. If you do that on a 10-year or say the 10-year day is about 360, 365, it goes to 465, not a huge movement. What's my total return? What's a negative outcome?
And to us, if you get a negative outcome in a rising rate environment such as that, we say you are not paid for that risk. And that's one of the prime reasons from just looking at it analytically why we don't find Treasuries attractive.