TIAA-CREF will rotate 5-12% of its intermediate bond portfolio, or $270-648 million, from Treasury Inflation Protected Securities into mortgage-backed securities, corporates and nominal Treasuries, according to Lisa Black, managing director and portfolio manager. Black declined to be more specific on the firm's potential purchases, saying that future allocation has not yet been defined, but spread products such as corporates and MBS will be given priority for yield purpose.
The move will happen sometime before year-end. The trigger will be when the 12-month average of the CPI hits the 2.5% annual level; the current annual rate is 1.5%. TIPS appreciate in value as inflation increases, and any level of inflation above the 1.3% inflation breakeven rate represents a profit, she explains. One way to get a sense of when the move will take place, says Black, is to watch monthly CPI figures over the next few months to see if they come in at 0.2% or above, which in annual terms, would translate into the 2.5% desired level. She adds that the firm's inflation's view is based on the belief that the economy will improve and interest rates will rise.
Black says she will sell the TIPS of '07 and '08. She says that the '07 and '08 maturities are particularly attractive to sell, because they offer a 12-month forward breakeven inflation rate of 1.1%, below the 1.3% cash breakeven rate. Forward breakeven inflation rates allow the calculation of TIPS's breakeven value based upon the security's maturity date.
Black manages a $5.4 billion portfolio out of New York. She allocates 32% to mortgage pass-throughs, 26% to corporates, 12% to TIPS, 11% to Treasuries, 8% to agencies, 6% to cash, 3.5% to asset-backed securities and 1.5% to commercial mortgage-backed securities. With a TIPS-adjusted duration of 4.0-years, the fund is slightly short the 4.25-year duration of its index, the Lehman Brothers aggregate.
