Thursday, February 21, 2008
Buy Tips Short Cah Bonds
--Rather than buy U.S. TIPS outright, bond-fund firm Pimco, a unit of German insurer Allianz SE, advises a trade of buying inflation-protected securities and selling cash, or nominal, bonds. The reason behind this strategy: Treasury prices have risen sharply in the past few months as the subprime mortgage turmoil has fueled flight-to-quality flows. Yields, which move inversely to prices, have been pushed down to very low levels. --"U.S. Treasurys yields are too low. Therefore to hold linkers outright could be a bit risky," said John Brynjolfsson, a managing director who is part of the team that runs the $13.180 billion Real Return Fund at Pimco. By holding the TIPS versus a short position in nominals, investors can lock in the difference in yields in the linkers and the nominals, known as the break-even, said Mr. Brynjolfsson. "You could profit quite a bit if inflation flares up." --TIPS are tied to the headline consumer price index, which rose 4.3% on a year-to-year basis, matching the biggest increase since September. --In the past decade, the global market for inflation-linked products has surged to $1.3 trillion from $103 billion in February 1997, according to data from Barclays Capital Inc. The U.S. captures the biggest share, with a size of $493 billion, followed by $351 billion in the euro zone and $306 billion in the United Kingdom, according to Barclays.