The Brown Brothers Harriman Inflation-Indexed Securities Fund may extend its duration if 10-year yields go a touch higher than present levels and the Federal Reserve is dovish on inflation. Jim Evans, manager of the $437 million fund in New York, said if the 10-year yield stays above 4.25% and oil remains at $45 a barrel or higher, he will increase duration by lightening up on short-end holdings and adding 10-years and longer Treasury inflation-protected securities. The 10-year closed at 4.195% on Jan. 18.
Evans said he may also buy 20-year TIPS if their break-evens, or the TIPS yield minus the yield of a nominal Treasury of a similar maturity, cheapens five to 10 basis points from the 20-year's current break-even of 2.80%. However, he declined to specify how much he would buy in that situation.
The fund's effective duration is 4.5 years compared to 4.3 years for its benchmark, the Citigroup Inflation-Linked Securities Index. Evans said his actions on duration would depend on the so-called Fedspeak in the coming weeks. "It's almost what the Fed says more than what it does nowadays," he observed.
The fund has been 15% overweight the seven- to 10-year sector of the markets since December. "We're avoiding the shorter maturities because the non-seasonally adjusted [consumer price index] drops off at the end and early parts of the year," Evans said. Recently he purchased the July '14s of 2% in December. Before that, he had been 15% overweight in the 10-year and out part of the curve and had bought the 3 3/8s of '32 in November.
The fund is composed of 84% in TIPS, 4% in nominal Treasuries and 6-10% in agencies and corporate inflation-linked notes.
