PIMCO purchased at least $200 million in Treasury Inflation Protected Securities maturing in 2032 at the U.S. Government's $5 billion auction earlier this month. Though it has historically been overweight intermediate TIPS, the fund has sold intermediates over the last month to raise cash for the purchase of the '32s. John Brynjolfsson, portfolio manager of the Real Return Bond Fund for the Newport Beach, Calif. bond giant, says the move was made because he believes the steep TIPS yield curve will eventually flatten or invert, given the scarce supply of long TIPS (the government auctions off only $5 billion per) and their increasing popularity among investors.
Brynjolfsson argues that TIPS "make sense structurally apart from any inflation forecast, because of the real yield they provide." He notes that a 10-year TIPS has a real yield of 3.11%. Assuming a 2% rate of inflation for the next year, it would yield 5.11%, compared to last week's 4.57% yield on a conventional 10-year Treasury. A three-year conventional Treasury note, which Brynjolfsson says has a risk more comparable to the 10-year TIPS, yielded 3.14% last week.
The $2 billion fund allocates 92% of its assets to U.S. TIPS, 3% to international TIPS, 2% to high-yield, 2% to mortgage-backed securities and adjustable-rate MBS and the remainder to emerging markets. At an effective duration of 3.1 years, it is slightly long its 3.0-year bogeys, the Lehman Brothers global TIPS index and the Barclays global TIPS index.
