On the view that the Federal Reserve Board may have to ease further, causing the yield curve to steepen, David Kotok, chief financial officer with Cumberland Advisors, is emphasizing an inflation management strategy by swapping out of taxable municipal bonds into Treasury Inflation Protected Securities.
Kotok declines to specify how such a move would affect his portfolio in terms of allocation. He says that the purpose is to capture more yield, and indicates that taxable muni spreads would have to narrow by 60-70 basis points for those securities to be considered for sale. As of last Monday, taxable munis were 200 basis points wider than comparable Treasuries.
Kotok says that TIPS are attractive because their yields are historically high. He looks at the 1.65% difference in yields between the nominal 10-year Treasury, which was yielding 5.15% last Monday, and the 10-year TIPS, yielding 3.50%. An example of a trade that Kotok is pondering is rotating into the 3.50% of '11, and selling callable State of New Jersey taxable municipal pension obligation 7.60% '29 (Aaa/AAA).
The Vineland, N.J.-based firm has $250 million of taxable fixed-income assets and an asset allocation of 50% TIPS, 35% taxable munis, 5% cash, 5% short-term Treasuries and 5% MBS.
