Investors bet big on rising inflation

Published Tue, Apr 5 20164:45 PM EDT

Breakingviews

Swaha Pattanaik

Investors – at least in the United States – are rediscovering inflation. There's fresh appetite for U.S. bonds that protect against price increases, known as Treasury Inflation-Protected Securities or TIPS. Price rises have for some time been too feeble for Western central bankers' liking. But money managers are betting change is afoot. Richard Turnill, global chief investment strategist for BlackRock , said on March 30 he fancied TIPS as an investment. There have been seven straight weeks of net flows into such securities, according to Bank of America Merrill Lynch . U.S. 10-year inflation-linked bond prices have risen above 105 for the first time since 2013, while the breakeven implied inflation rate has climbed to 1.63 percent from February lows of 1.19 percent. More from Breakingviews : Uncle Sam's anti-inversion hunt may bag big trophy The core personal consumption expenditures (PCE) price index, which excludes food and energy prices, has inched up. The measure, a version of the inflation indicator that the U.S. Federal Reserve targets, rose 1.7 percent in February from a year earlier, holding its highest level since July 2014, the Bureau of Economic Analysis said on March 28. Fed Chair Janet Yellen said on March 29 the latest figure was somewhat higher than she had expected in December. U.S. prices could be set to rise faster. James Bullard, president of the St. Louis Fed, predicted in a Bloomberg interview on March 23 that the annual rate of change in core PCE would surpass 2 percent in 2017. This chimes with a rise in research firm ECRI's gauge of future U.S. inflation, which in March hit its highest since 2008. Inflation has long undershot the Fed's long run 2 percent target. Investors are wondering how tolerant Yellen will prove of a higher rate, when it comes. The Fed has proved reluctant to derail economic growth by raising interest rates, so it's little wonder then that asset managers are assuming the answer is "very tolerant" and snapping up bonds with built-in inflation protection. However, investors are unlikely to take the same thesis across the Atlantic. Euro zone core inflation has picked up to 0.9 percent, but the European Central Bank in March slashed its headline inflation forecast for 2016 to just 0.1 percent. The vogue for inflation-linked bonds looks likely to remain an American fad for a while yet. For more independent commentary and analysisfrom Reuters Breakingviews, visit breakingviews.com

George Diebold | Photographer's Choice | Getty Images