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Global Inflation to Climb, Favoring TIPS, Pimco’s Worah Says

Global Inflation to Climb, Favoring TIPS
At China Natural Gas Inc. filling station in Xi'an, Shaanxi Province, China. Photographer: Qilai Shen/Bloomberg

June 18 (Bloomberg) -- Global prices are poised to climb during the next three to five years as developed nations seek to reduce debt burdens, favoring Treasury Inflation Protected Securities, according to Pacific Investment Management Co.

Inflation will increase at more than the about 2 percent core rate that the world’s biggest economies have encountered in past years, Mihir Worah, managing director and head of real-return portfolio management at Pimco, said in a copy of comments obtained by Bloomberg News. Increasing wealth in emerging markets and a weaker dollar may also boost prices, he said.

“In developed markets, there is a serious debt problem,” wrote Worah of Newport Beach, California-based Pimco, the world biggest manager of bond funds. “It is going to be hard for developed countries to grow out of it. Inflation is one of the only solutions that we see as likely to occur.”

The U.S. consumer price index declined 0.3 percent in May, more than forecast and the biggest drop since December 2008, after no change the prior month, the Labor Department reported June 14. Yields on 10-year Treasuries touched 1.44 percent on June 1, the lowest on record, as Europe’s debt crisis intensified and concern mounted that the U.S. economy is slowing.

Market Forces

“Emerging markets for years have been a force of disinflation, exporting very low prices for goods and services, and we see that changing,” Worah said. The growing middle class in smaller economies may spur “a rise in global commodities prices.”

TIPS have returned 0.3 percent in June, on pace for the securities’ third-straight monthly gain, according to Bank of America Merrill Lynch Index data. The debt has appreciated 5.1 this year after gaining 14.1 percent in 2011, the best return since 2002.

“The core asset” for investors seeking to hedge inflation is TIPS, Worah said. “These should be the bedrock of any inflation-hedging strategy.”

Commodities, dividend-paying stocks, real-estate investment trusts and inflation-protected securities from emerging market countries such as Mexico and Brazil may also be options for investors seeking “potentially higher returns,” he said.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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