American Century Investments is riding out the flattening of the yield curve by overweighting the long end and underweighting the short parts of the curve. The asset manager has used this strategy to take advantage of the curve flattening from more than 200 basis points to 38bps on June 2 and will maintain the position, according to Jeremy Fletcher. Fletcher manages $1.4 billion in inflation-linked bonds from Mountain View, Calif. He declined to name a target level for taking off the flattening trade or discuss his forecast for the 2s/10s curve.
In one leg of his flattening trade Fletcher is buying 10-year Treasury futures and selling two-year futures. The manager likes to accentuate his flattening strategy through futures because he does not have to deal with settlement as he would with nominals.
But since the vast majority of Fletcher's portfolio is allocated to TIPS, the manager is also overweight 10-year TIPS and underweight two-year TIPS. He said he sold off nominals two years ago when he thought breakevens were going to widen, signaling TIPS would outperform nominal Treasuries.
With TIPS yields so low, Fletcher has reached for extra spread by buying corporate inflation-linked securities. He owns Sallie Mae 1.32% of '10s and the Toyota Motor 1.22% of '09s. The bonds offer a considerable yield boost over the comparable April '10s of 7/8% TIPS.
Fletcher's benchmark is the Citigroup Inflation-Linked Securities Index.