Tedford sold off his holdings of the inflation-based product in the fall of 2002 and has not bought any since because of the product's richness. "We were an early proponent of TIPS back in 1999 when they were relatively not so well understood. The problem is they're overvalued now," he explained.
To fund the purchases of TIPS, Tedford said he may shift cash from his 5% allocation of Fannie Mae and his more than 90% holdings of Treasuries. The manager has been gradually cutting back his Fannie Mae debt from 15% over the past year, mostly to maintain his portfolio's duration.
"We've been unwinding them for some time because of the accounting situation and Chairman Alan Greenspan's comments that we need to take away the government's implied guarantee," Tedford noted.
Tedford said he would also increase his portfolio's duration once inflation peaks, which he believes may be at 3.25% by late in the first quarter of 2005, up from 2.7% as of Nov. 12, barring any further spikes in oil prices. Tedford's portfolio is 0.85 years short of his duration's benchmark, the Lehman Brothers Intermediate Treasury Index.