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AmEx Could Unwind Curve Flattening Trade

American Express Financial Advisors may buy back short- and long-term TIPS for its $100 million AXP Inflation-Protected Securities Fund.

American Express Financial Advisors may buy back short- and long-term TIPS for its $100 million AXP Inflation-Protected Securities Fund. Jamie Jackson, portfolio manager in Minneapolis, said he would buy back the wings should the slope of the TIPS curve flatten by 25 basis points. He will also lengthen the fund's duration should the level of TIPS real rates rise by 75-100bps. The fund is invested almost entirely in TIPS.

Jackson expects the curve will flatten by 25bps within the next six months. The spread between the real rates of two- and 10-year TIPS was 110bps as of Feb. 22. The manager said he would finance the move by selling bonds in the five- to 10-year sector, where he is currently overweight. He declined to quantify the overweight or specify how much he would sell.

Jackson said he would also bring his fund's duration closer to that of its benchmark should real rates rise by 75-100bps. The manager foresees real rates will rise by that much by year-end. The fund is currently half a year short of its index, the TIPS component of the Lehman Brothers Global Real Rate Index. Jackson said he would add duration by buying 10 years and longer but declined to quantify the amount.

Jackson also predicts the headline consumer price index will fall to 2.5% within the next six months, which would cause him to maintain his less than 1% position in two-year U.K. gilts and German bunds.

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