By Min Zeng
A rare sighting of higher-than-expected inflation numbers
ignited a rally Thursday in U.S. government bonds that compensate
investors for rising price levels, extending what has been a
comeback year for the debt.
While the overall consumer-price index fell last month, the CPI
excluding energy and food posted a 1.6% increase on an annual
basis. The reading encouraged investors to scoop up Treasury
inflation-protected securities, or TIPS, which suffered a large
retreat in the second half of 2014 as global inflation readings
sank.
The data bolstered Federal Reserve Chairwoman Janet Yellen's
stated view that the effect from tumbling oil prices won't push
inflation down further, allowing it to move back to the central
bank's 2% target in coming years.
Policy makers favor 2% inflation because it encourages consumers
and businesses to spend rather than hoard cash, as they sometimes
do when inflation falls. Japan has been locked in a battle with
deflation for more than a decade, and recently European officials
have taken action to halt expectations that prices would fall.
"The CPI report is giving the TIPS market confidence that the
Fed may be able to win the war against disinflation," said Jonathan
Lewis, chief investment officer at Samson Capital Advisors LLC,
which has $7.6 billion in assets under management.
The inflation data sparked a selloff in regular Treasury bonds.
Unlike TIPS, these bonds' fixed return over time will be eroded if
consumer prices increase. The yield on the benchmark 10-year
Treasury note settled at 2.016%, compared with 1.968% on Wednesday.
Yields rise as bond prices fall.
Investors plowed $252 million of new cash into U.S.-based bond
funds and exchange-traded funds targeting purchases of TIPS this
year through Feb. 18, according to data from Lipper. That is the
first inflow following $2.98 billion of net outflows last year and
a record net redemption of $34.77 billion in 2013.
TIPS help holders hedge against inflation by boosting principal
payments once consumer price inflation breaches a certain
threshold.
The flows reflect investors' struggle to find assets offering a
mix of safety and income at a time of uneven economic growth, low
interest rates, near record stock prices in many regions and fears
that rich economies will be beset for years by insufficient demand
for goods and services.
Some analysts caution that there is little need to buy inflation
protection, given the low level of annual price increases since the
early 1980s. Yet TIPS buyers are betting that inflation in the
longer term will gradually rise thanks to aggressive monetary
stimulus from more global central banks, while wage pressure in the
U.S. will gradually increase amid strong job growth.
A $9 billion sale of 30-year TIPS last week drew the highest
foreign demand since 2010.
"TIPS are a good buy," said Mihir Worah, chief investment
officer on real return and asset allocation at Pacific Investment
Management Co., which has $1.68 trillion in assets under
management. "Inflation will not stay low forever."
The TIPS purchases highlight the premium attached to
high-quality bonds in a low-yield world. Soaring demand has sent
many bonds in Europe to trade at negative yields, meaning a
purchaser holding the debt to maturity faces a certain loss. The
European Central Bank will start buying bonds next week and the
buying binge will leave fewer bonds available for investors.
Pimco is one of the biggest investors in the $1.06 trillion TIPS
market. Mr. Worah said the firm has been "aggressive buyers this
year," without giving details.
TIPS have posted a total return--including price changes and
interest payments--of 1.42% this year through Wednesday, according
to data from Barclays PLC. That compares with 1.16% for nominal
Treasury debt.
Riskier assets have fared better. So-called junk bonds sold by
lower-rated U.S. companies have returned 2.75% over the same
period. The S&P 500 stock index has gained 3% including price
changes and dividend payments, according to FactSet.
Some investors are betting that wages in the U.S. will rise
after years of sluggishness. TJX Cos. said Wednesday that it will
increase pay for its U.S. workers starting in June. Wal-Mart Stores
Inc. earlier this month also announced a plan to raise wages for
U.S. employees this year.
"Wage pressure will not come immediately but in the longer term
it will rise," said Richard Schlanger, a fund manager at Pioneer
Investments in Boston which has more than $40 billion in assets
under management.
Mr. Schlanger said he has bought TIPS in recent weeks, adding
that he doesn't believe "we are in a deflationary world."
Write to Min Zeng at min.zeng@wsj.com
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