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Wednesday, January 8, 2014

US inflation expectations hit four-month high

Be reminded that Americans run for silver when they see prices going up for their consumer goods and cost of living. They have little understanding of the 'value of a dollar' only that it will get them less gas, less food, and coincident with rising interest rates cost them more to borrow to maintain their dropping quality of life. The Federal Reserve can't help you. They work for somebody else. Are you ready? Great!

 US inflation expectations hit four-month high

January 8, 2014 9:08 am
By Michael Mackenzie in New York

US inflation expectations have jumped to their highest since September, with central banks and investors seeking insurance against the prospect that a recovering American economy will stoke price pressures.

Inflation expectations, as measured by the difference between yields on 10-year nominal Treasury notes and Treasury inflation protected securities (Tips), have risen to 2.25 per cent from a low of around 2.10 a month ago. Tips help insulate holders from the threat of rising prices, as their value increases when the seasonally adjusted consumer price index rises. In contrast, holders of fixed-rate bonds suffer as inflation erodes their value.

Higher market expectations for US inflation comes after a tough year for the sector, with big investor outflows and a rare negative annual return characterising the asset class for 2013. US inflation fell last year, wrongfooting buyers of Tips who had expected accelerating consumer prices due to the Federal Reserve’s infusion of money into the financial system under its quantitative easing policy.

As the new year has begun, modest exchange traded fund outflows are being outweighed by demand from foreign central banks and other long-term investors focused on seeking inflation protection as it is seen being an buying opportunity in the wake of the asset classes’ underperformance in 2013.

Orhan Imer, portfolio manager of the Columbia Inflation Protected Securities Fund said compared with a year ago, “the value of Tips is clearly in a zone that is much more attractive. When you have a growing economy, eventually inflation picks up.”

Also influencing investors is the view that the Fed will maintain an easy policy of near zero overnight interest rates until consumer inflation is much higher.

“Inflows are dominating the asset class with the biggest source being central banks, and they’re working towards an asset allocation target that’s significantly above where it is now,” said Mihir Worah, portfolio manager at Pimco. “We are looking to end 2014 with higher core inflation and I’ve been a buyer for my clients in recent months. Tips are cheap and attractive.”

In recent weeks, the pace of US retail outflows from the Tips sector has slowed and bond traders say demand from foreign central banks has increased. The iShares Tips bond exchange traded fund has seen a small outflow of $22m so far this year, after $7.9bn was pulled from the sector during 2013 according to Index Universe.

“Foreign investors with a long-term horizon want inflation protection,” said James Evans, portfolio manager at Brown Brothers Harriman. “They seem more wary of US inflation than domestic investors.”

That has helped pushed expectations of future inflation higher and buoy prospects for next week’s auction of $15bn in new 10-year Tips.
It comes after holders of US inflation-linked bonds lost money during 2013, for only the second time for a product introduced in 1997 and which has grown substantially and been heavily marketed by Wall Street as providing insurance for bond portfolios.

“Investors who have bought Tips and expected to be rewarded for buying such insurance have been disappointed as inflation has not risen,” said Michael Pond, inflation strategist at Barclays. “We think that is the wrong way to look at the market and we expect inflation is going to turn higher.”

Barclays expects US core inflation will rise from a current annual rate of 1.7 per cent to 2 per cent by the middle of the year and that 10-year break-even inflation rates will approach 2.5 per cent.