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Texas Investor Puts Stock In TIPS

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Sage Advisory Services has shifted its Treasury bond portfolio into inflation-protected securities and out of traditional government bonds as part of a broader defensive strategy, lowering its duration in the process, according to firm President Bob Smith.

He said the Austin, Tex.,-based firm, which manages about $2.8 billion in taxable fixed income, has shifted some $250 million worth of bullet Treasuries in its intermediate bond portfolio into TIPS, on the view that the consumer price index will continue to be higher than expected. Sage sold current coupon 10- and 30-year Treasuries and bought seven- and 10-year TIPS. "We're trying to stay on that part of the curve where we feel we are most rewarded," he explained, adding Sage will continue to park new cash earmarked for government debt into inflation-protected bonds. The move did not affect Sage's overall 15% allocation to Treasuries.

On the agency side, Sage is letting its allocation to Fannie Mae and Freddie Mac debt erode and is looking to buy paper from other quasi-government issuers such as Federal Home Loan Banks and Federal Farm Credit Banks. Smith said this is because the former continue to face significant political risks from the likes of Rep. Richard Baker (R-La.), are overleveraged, and are vulnerable to the changing demographics of America. That, and he feels the refinancing burst has played itself out. "We're trying to build up current yield that's afforded through callable agencies, in a liquid market, and you can't get that in corporates," he said, adding that the agencies he favors are "not victims of Wall Street analysis, like Fannie and Freddie." Agencies account for about 40% of the portfolio, with the majority in callable securities.

Sage's intermediate portfolio has a roughly 20% allocation to investment-grade corporates. The manager does not buy high yield paper and only invests in corporates with ratings of A minus or better. Partly due to the shift in Treasuries, the portfolio is 15-20% short the duration of its benchmark, the roughly 3.5-year Lehman Brothers government/corporate intermediate bond index.

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