Columbia Management Buying TIPS After Worst Losses Since 1997

Columbia Management Investment Advisers LLC said it’s buying Treasury Inflation Protected Securities after the debt lost more than three times the decline in the broader Treasury market this year.

TIPS are poised to reverse course as the economy strengthens, the Federal Reserve cuts stimulus and inflation expectations rise from almost a two-year low, Gene Tannuzzo, a Minneapolis-based portfolio manager at the company, said yesterday in an interview.

“With how low inflation and inflation expectations have gotten lately, you don’t need much inflation for TIPS to make sense,” said Tannuzzo, whose company oversees $340 billion. “Over the long term, the Fed doesn’t want to see inflation expectations come down too much further. Even though they have crafted a new course of policy with talk of tapering, inflation expectations will still matter.”

The difference between yields on 10-year notes and comparable TIPS, a gauge of trader expectations for consumer prices over the life of the debt, widened to as much as 2.08 percentage points yesterday after touching 1.81 percent on June 24, the least since October 2011.

Fed Chairman Ben S. Bernanke said June 19 policy makers may begin slowing their third round of bond purchases under the quantitative-easing stimulus strategy this year and end it in 2014 if economic growth meets their estimates. Central-bank officials forecast expansion of as much as 2.6 percent this year and 3.5 percent in 2014.

Fed Purchases

The Fed is buying $85 billion of Treasuries and mortgage bonds every month to put downward pressure on borrowing costs. It purchased $2.3 trillion of assets from 2008 to 2011 in the first two rounds.

“The reason the Fed is tapering is because the economy can handle it,” Tannuzzo said. “The economy is better, and inflation is likely to print higher, sending inflation expectations up.”

TIPS lost 8 percent in the first half of the year, according to the Bank of America Merrill Lynch U.S. Inflation-Linked Treasury Index, the worst two-quarter performance ever for the securities since at least 1997, as far back as the gauge extends. The broad Treasuries market fell 2.5 percent from January through June, according to the Bank of America Merrill Lynch U.S. Treasury Index.

Returns on the inflation-indexed debt had topped those of nominal Treasuries even year from 2009 through 2012, the Merrill Lynch indexes show. TIPS averaged an annual gain of 9.4 percent, while nominal Treasuries averaged an advance of 3.5 percent.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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