TIPS Lose Appeal as Cost of Living Seen Unchanged

Treasury Inflation Protected Securities, which have outperformed conventional U.S. government debt every year since the financial crisis of 2008, are losing their appeal.

TIPS handed investors a 1.6 percent loss in the past month, versus a 0.9 percent decline for bonds that don’t offer inflation protection, according to Bank of America Merrill Lynch indexes. U.S. consumer prices were probably unchanged in December from the month before, after falling in November, according to a Bloomberg News survey of economists before the U.S. reports the figure Jan. 16.

“Consumer prices are under pressure,” said Hans Goetti, the Singapore-based chief investment officer for Asia at Finaport Investment Intelligence, which manages the equivalent of $1.5 billion. “Unemployment is still high. We’re going to revisit the lows in yields” for nominal bonds, he said. Finaport favors the securities over TIPS, Goetti said.

Ten-year futures contracts for March delivery were unchanged at 131 29/32 as of 6:31 a.m. in London. Trading of Treasury bills, notes and bonds was closed in Japan today for a holiday, according to the Securities Industry and Financial Markets Association website.

Benchmark 10-year yields dropped three basis points, or 0.03 percentage point, last week to 1.87 percent. The record low was 1.38 percent set in July.

Ten-yields will rise to 2.27 percent by year end, according to a Bloomberg survey of banks and securities companies, with the most recent projections given the heaviest weightings.

Inflation Expectations

On an annual basis, consumer prices probably rose 1.8 percent in December, Bloomberg surveys showed. The rate has averaged 2.3 percent over the past year. It was as high as 14.8 percent in 1980.

The difference between yields on 10-year notes and same- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.51 percentage points. The average over the past decade was 2.19 percentage points.

Inflation may at times run modestly above the Federal Reserve’s 2 percent target, Fed Bank of Chicago President Charles Evans said today in Hong Kong.

U.S. economic growth this year will probably generate only a small decline in unemployment from the current level of 7.8 percent, he said. The jobless rate was as low as 4.4 percent in 2007 before credit markets froze and the world economy began to contract in 2008.

Investor Returns

That was the last time nominal Treasuries beat TIPS, as the crisis spurred demand for the safety of government bonds and sent inflation expectations to zero.

Last year, TIPS returned 7.3 percent, versus 2.2 percent for conventional Treasuries, the Bank of America data show.

Fed Chairman Ben S. Bernanke is scheduled to speak at 4 p.m. today in Ann Arbor, Michigan.

The Fed is purchasing $85 billion of government and mortgage debt a month to spur the economy by putting downward pressure on interest rates. The central bank plans to buy as much as $1.75 billion of Treasuries maturing from February 2036 to November 2042 today, according to the website of the Fed Bank of New York.

U.S. data tomorrow may show retail sales rose and producer prices fell in December, Bloomberg surveys of economists show.

Import prices dropped last month and the trade deficit widened in November, the government reported Jan. 11.

GDP Outlook

“Friday’s combination of a dip in December import prices and surge in the trade deficit point to decelerating inflation and soft” fourth-quarter economic growth, according to a report on Jan. 11 by Ward McCarthy and Thomas Simons, economists at Jefferies & Co. The New York-based company is one of the 21 primary dealers that trade directly with the Fed.

U.S. gross domestic product growth probably slowed to an annualized pace of 0.8 percent in the fourth quarter from 3.1 percent in the third, based on a Bloomberg survey of economists. The Commerce Department reports the figure Jan 30.

The Treasury Department is scheduled to announce Jan. 17 how much it plans to sell in 10-year TIPS on Jan. 24. The amount will probably be for a record $16 billion, versus $13 billion at the last auction of the securities in November, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey.

Treasuries are poised to get some help from Shinzo Abe as Japan’s prime minister buys U.S. government bonds to weaken the yen and boost his nation’s slowing economy.

A fund to buy foreign securities that Abe’s Liberal Democratic Party has pledged to consider may amount to 50 trillion yen ($558 billion), according to Nomura Securities Co. and Kazumasa Iwata, a former Bank of Japan (8301) deputy governor. JPMorgan Securities Japan Co. says the total may be double that.

“I can’t imagine the U.S. would be disappointed in Japan buying Treasuries,” Jack McIntyre, a fund manager who oversees $34 billion in global debt at Brandywine Global Investment Management in Philadelphia, said in a Jan. 8 telephone interview. “The Fed’s been doing all the heavy lifting.”

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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