Bailard, Biehl & Kaiser is looking to add 4.25% TIPS of '10 to its $100 million Bond Opportunity Fund. This move will involve 2-3% of the portfolio, according to portfolio manager Eric Leve. He says the disappearance of the U.S. budget surplus will exert upward pressure on nominal Treasury yields, which makes TIPS attractive relative to on-the-run Treasuries even without inflation. However, he believes the potential for inflation, as well as the likelihood of the Federal Reserve beginning rate hikes in August, will give TIPS still further support. Leve says Bailard, Biehl & Kaiser will sell nominal Treasuries to raise money for the TIPS purchase, which it will make once the market becomes more certain of August rate hikes.
Leve also believes that the Tyco International 4.95% notes of '03 (Baa2/BBB) which Bailard, Biehl & Kaiser already owns, will trade higher as investors see increased potential for the firm's CIT spin-off to go forward. The firm will try to allocate an additional 1% to the issue. Leve believes that once the market becomes sure that the sale will go through, the bonds will trade at 95 or 96. They were at 93 last Tuesday. To make the purchase, Leve will likely take profits in commercial bank bonds--possibly the Bank of America 7.4% notes of '11 (Aa3/A) which were 105 basis points over the curve last Tuesday or the First Union 7.8% notes of '10 (A1/A), which were bid at 100 over the curve. He may also use assets raised from the recent sale of Harrah's Entertainment's 7.125% notes of '07 (Baa3/BBB-). The gaming company's bonds were bid at 103 last Tuesday.
The Foster City, Calif., firm allocates 32.5% to corporates, 30% to Treasuries, 17.5% to U.S. and supernational agency securities, 17% to non-U.S. dollar-denominated debt, 2.5% to cash and 1% to TIPS.
