BlackRock’s Rieder Pushes Case for Inflation Hedge as TIPS Gain

Rieder: Central Banks Place Cloud Over Bank Industry
  • Inflation ‘priced significantly too cheap’ in market: Rieder
  • Thirty-year Treasury debt wraps up second week of losses

A Treasuries-market measure of inflation expectations is the highest since July. Yet for BlackRock Inc.’s Rick Rieder, it isn’t too late to buy protection against rising consumer prices.

The gap between yields on five-year inflation-indexed securities and regular notes, a gauge of investors’ annual inflation outlook through 2021, rose to 1.37 percent Friday after a stronger-than-projected report on consumer prices, data compiled by Bloomberg show.

The measure, known as the break-even rate, has rebounded along with oil prices after setting a seven-year low in February. Yet in the view of Rieder, chief investment officer for global fixed income at the world’s biggest money manager, break-evens still have more room to rise given the Federal Reserve’s signal that it will take a gradual approach to raising interest rates.

“The Fed is going to let inflation run hotter,” Rieder, who’s based in New York, said on Bloomberg Television. Given that expectation, “inflation is priced significantly too cheap in the markets.”

Rieder, whose firm manages $4.9 trillion, spoke Friday as 30-year Treasuries were wrapping up a two-week slide. Yields on the long bond climbed 17 basis points, or 0.17 percentage point, to 2.45 percent, and reached the highest since June this week. The selloff came in part on speculation that the Bank of Japan is about to shift monetary policy to steepen its yield curve.

In the U.S., inflation-linked securities, known as TIPS, have proven a winner this year in part as more investors prepare for a pickup in inflation. TIPS have returned about 6 percent in 2016 versus about 4.5 percent for conventional Treasuries, according to index data compiled by Bloomberg. TIPS had underperformed the previous three years.

The Fed, which releases its next policy decision Sept. 21, reiterated in July that it expects inflation to rise to its 2 percent target over the medium term. The Fed’s preferred gauge of price pressures has been below that goal for more than four years.

BlackRock has company in expecting inflation to quicken. Pioneer Investment Management is setting up the first-ever global inflation-linked bond fund in its 88-year history to prepare for an acceleration.

San Francisco Fed President John Williams at a summit last month asked his colleagues to consider moving the inflation target higher, in a strategy to push away from the zero boundary on interest rates.

Futures traders see a 20 percent chance of a Fed hike next week, and about a 55 percent likelihood by year-end, based on the assumption that the effective fed funds rate will trade at the middle of the new target range.

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