WASHINGTON — Some fixed-income money managers are concerned they could lose a much-needed tool to hedge against medium-term price fluctuations if the Treasury Department stops issuing five-year Treasury inflation-protected securities. A proposal to that effect was presented by the Treasury Borrowing Advisory Committee, comprising representatives from 14 money management firms and investment banks, at a July 29 meeting with Treasury officials in Washington.
“I think discontinuing the five-year TIPS would remove liquidity from the market and hurt the entire TIPS program,” Mihir Worah, lead portfolio manager for the $15 billion Real Return Fund at Pacific Investment Management Co., Newport Beach, Calif., said in an interview.
“There is a need for liquidity across the yield curve to allow investors to better manage the specific inflation and real-rate risk,” added Mr. Worah, who also is responsible for $80 billion total that PIMCO has in real-return assets. Overall, the firm has $829.5 billion assets under management.
Although PIMCO is a member of the TBAC, Mr. Worah said he was not privy to the closed-door discussions, beyond the minutes of the meeting published by Treasury.
In the past, TBAC recommendations proved influential and were followed by important Treasury announcements, such as ending the 30-year Treasury bond in October 2001 or resuming the 52-week Treasury bill auctions in April.
One reason for ending five-year TIPS is the lack of liquidity in the $497 billion market, which has a low daily average turnover of just 2%, or $8 billion, because of the buy-and-hold nature of the security. Because of its lack of liquidity, the TIPS market did not attract investors the way the $4 trillion U.S. Treasury securities market did during the recent credit turmoil.Further, the five-year issue is the shortest maturity on the TIPS curve — an investment horizon that some TBAC members saw as too limited.
“The reason TBAC recommended the elimination of the five-year TIPS is because it believes Treasury can better capture the inflation risk premium at longer maturity points,” said Michael Pond, U.S. fixed-income strategist at Barclays Capital in New York, after reviewing the minutes. Barclays is the world's largest TIPS dealer.
Mr. Pond said regardless of the debate about the need for a five-year TIPS maturity, this is not the time to alter the Treasury program, given the turmoil in the credit markets.