Gotham Shop Buys TIPS,
Inflation-indexed bonds, as well as callable agency securities, are where Trevor, Stewart, Burton & Jacobson has been putting new money to work, given both the recent rally in bonds and the firm's bearish bond view going forward, according to portfolio manager Alan Kral. He has been buying callable agencies--Freddie Mac orFannie Mae bonds that are callable after a certain period of time has expired, usually two years--as a yield play. He has been picking up upper investment grade spreads on short maturity paper without sacrificing credit quality. On a called bond, he typically can receive 125 basis points above AAA commercial paper, allowing him a 5.9-5.95% current yield. On bonds the agencies do not, or can't, exercise their right to call, he gets 80-90 basis points to the 10-year Treasury bond, or a 5.80% current yield.
Inflation-indexed bonds, or TIPS, are treasuries that provide a below market coupon, usually 3-3.5%, which is coupled to the current rate of CPI as well. Kral argues that inflation represents a bigger threat than both the market and the Federal Reserve recognize, with money supply growing and CPI having doubled over the last 18 months, from 1.75% in late 1999 to 3.5% in February this year.
The New York City-based fund has $500 million under management and an asset allocation of 75% U.S. treasuries (both TIPS and regular coupons), 15% U.S. treasury zero-coupon bonds, 5% agencies and 5% MBS. The fund is short its internal proprietary benchmark by one-half year, at 3.0 years.