Goldman Sachs Group Inc. and the Federal Reserve Bank of St. Louis are the latest to flag a pick-up in consumer-price pressures, after Pacific Investment Management Co. recommended buying inflation-linked debt last week.
Treasury Inflation Protected Securities outperformed conventional bonds last quarter for the first time in a year as the Fed’s own measure of the inflation outlook climbed to a seven-month high. St. Louis Fed President James Bullard said Tuesday some inflation numbers have looked more lively and higher interest rates are needed to guard against asset-price bubbles.
“Inflation pressure in the euro zone and Japan remains low, while it is highest in the U.S.” among the Group of 10 developed nations, Goldman Sachs analysts Robin Brooks, George Cole and Michael Cahill wrote in a client note on June 30. The U.S. has “the most broad-based inflation pick-up.”
Benchmark 10-year Treasury yields rose four basis points, or 0.04 percentage point, to 2.40 percent at 7:41 a.m. New York time, according to Bloomberg Bond Trader data. The 2.125 percent note due May 2025 fell 11/32, or $3.44 per $1,000 face amount, to 97 21/32. Ten-year TIPS yields were at 0.50 percent.
TIPS fell 1.32 percent in the second quarter, compared with a 1.84 percent slide in conventional Treasuries, according to Bank of America Merrill Lynch bond indexes.
“TIPS prices, in our view, reflect an insufficient risk premium,” Mihir Worah, who helps manage Pimco’s $107.3 billion Total Return Fund, wrote in a recent note. “Inflation is more likely to surprise to the upside.”
The Fed’s five-year, five-year forward break-even rate was at 2.1606 percent on June 23, the most since November. It had slumped to a 16-year low of 1.75 percent on Jan. 30. The gauge projects the expected pace of consumer price increases over the five-year period beginning five years from now.
The Fed targets a 2 percent inflation rate.
“I don’t think inflation is at risk of breaching the Fed’s target, but I think the risk is that inflation is going to head higher,” said Janu Chan, an economist at St. George Bank Ltd. in Sydney. “You have a labor market which is very close to approaching full employment, so there is that risk that inflationary pressure will build.”
Payrolls data released by the Labor Department on July 2 will show employers added more than 200,000 jobs for the 15th time in 16 months in June, according to a Bloomberg survey of analysts.