Nov. 7 (Bloomberg) -- Investors should buy 20-year Treasury Inflation Protected Securities, or TIPS, because U.S. government efforts to alleviate the financial crisis will spur inflation in coming years, according to Alex Li, an interest-rate strategist at Credit Suisse Securities USA LLC.

``The whole idea is these government measures aren't going to work tomorrow, next month or next year,'' Li said in an interview. ``They're more geared toward helping the economy long-term, and therefore it's good for inflation products over the long run.''

Yields on 20-year TIPS have risen relative to those on comparable-maturity Treasuries since July amid a 58 percent drop in the price of oil and a contraction in gross domestic product. TIPS' principal payments rise in tandem with the consumer price index, so an increase in their yields indicates traders expect inflation to fall.

The yield on the 1.75 percent inflation-linked bond due in January 2028 rose 4 basis points, or 0.04 percentage point, today to 2.98 percent, according to Barclays Capital Inc. That's up from 1.73 percent on Jan. 28.

Headline inflation, which includes food and energy prices, will likely fall to minus 1.3 percent by mid-2009, then rise to a 2 percent annual rate in the second half of next year, Li said. Consumer prices rose 4.9 percent in the 12 months to September, according to the Labor Department.

Breakeven Rate

Investors can bet on rising inflation by buying TIPS and selling regular Treasuries in a wager that the yield gap will widen as TIPS outperform. Twenty-year TIPS yielded 1.66 percentage points less than regular Treasuries today, compared with 2.83 percentage points in March, the widest gap this year. The difference, known as the breakeven rate, reflects the average rate of inflation traders expect over the life of the security. It averaged 2.68 percentage points in the three years prior to the onset of the subprime mortgage crisis in August 2007.

The 20-year breakeven rate ``eventually will return to the historical norm before the crisis,'' Li said.

The Federal Reserve and U.S. Treasury have created unprecedented programs to contain a crisis that has frozen credit markets and pushed the global economy toward recession. The Treasury has bought equity stakes in banks under a $700 billion rescue law, and the Fed has flooded the banking system with cash through lending initiatives such as the Term Auction Facility.

TIPS are also cheap relative to European inflation-linked securities, Li said. While the gap between ``long-end'' U.S. and European breakeven rates was about 20 to 50 basis points before the financial crisis, it's now about minus 47 basis points, reflecting expectations inflation will drop faster in the U.S. than in Europe ``in the near term,'' he said in a note to clients dated Nov. 6.

To contact the reporter on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net

Last Updated: November 7, 2008 13:32 EST