TIPS Trail Conventional Bonds Before Consumer Price Data

U.S. inflation-protected securities lagged behind conventional Treasuries by the most in 14 months before a government report today economists said will show costs in the economy are in check.

Investors in Treasury Inflation Protected Securities have lost 0.7 percent this month, equivalent to a 12 percent decline at an annual rate, according to Bank of America Merrill Lynch indexes. So-called nominal securities are delivering a 1 percent annualized decline. It was the steepest underperformance for TIPS since December 2011. The U.S. is scheduled to sell $9 billion of 30-year TIPS today.

“Inflation’s not worrisome,” said Kei Katayama, who buys non-yen debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $53 billion and is a unit of Japan’s second-largest brokerage. “It may increase eventually, but the current mix of slow growth and relatively high unemployment means there’s not much pressure for inflation.”

U.S. 10-year rates were little changed today at 2 percent as of 6:42 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2 percent security due in February 2023 was 100.

Japan’s 10-year rate declined 1/2 basis point to 0.735 percent. A basis point is 0.01 percentage point. The nation’s sovereign debt market has gained 0.2 percent this month, or 3.8 percent annualized, the Bank of America data show.

U.S. Inflation

U.S. consumer costs probably rose 0.1 percent in January from the month before, after being unchanged in December, according to a Bloomberg News survey of economists before the Labor Department report at 8:30 a.m. in Washington.

Prices excluding food and energy climbed 0.2 percent, following a 0.1 percent increase, based on economists’ responses.

Annual inflation slowed to 1.6 percent from 1.7 percent, the survey shows. The figure was as high as 14.8 percent in 1980.

Sales of previously owned U.S. homes eased in January, and a measure of the economic outlook for three to six months climbed, reports today will show, based on the economists’ forecasts.

The U.S. economy will expand 1.8 percent in 2013, versus 2.2 percent in 2012, based on Bloomberg analyst surveys. The unemployment rate was 7.9 percent in January, versus the average of 6 percent for the past 20 years.

The Federal Reserve and Fidelity Investments both warned this week that the central bank’s unprecedented efforts to spur the economy risk sending costs higher.

Several policy makers said the Fed should be ready to vary the pace of its $85 billion in monthly bond purchases, according to the minutes of the central bank’s Jan. 29-30 meeting released yesterday in Washington.

Costs, Risks

The minutes said “many participants” expressed concern about “potential costs and risks arising from further asset purchases.” Several discussed “possible complications” that additional purchases could have as the Fed begins to end the policy, and a few mentioned inflation risks.

The Bank of Japan’s decision in January to adopt an inflation target of 2 percent adds to the odds that costs will rise, according to Boston-based Fidelity, which oversees $1.67 trillion.

“We have reason to believe that the Fed is likely to stay very accommodative for some time and that Japan is now taking a page from the U.S. Fed and stepping up its monetary stimulus,” Jurrien Timmer, co-manager of Fidelity Global Strategies Fund, wrote on the company’s website Feb. 18. The policies may create an “inflation scare,” the report said.

Fund Gains

ProShares UltraShort TIPS exchange-traded fund, which bets against U.S. inflation-protected debt, has gained 2.7 percent this year, according to data compiled by Bloomberg. It fell 13 percent in 2012. The fund seeks investment results that correspond to twice the inverse of the daily performance of an index of TIPS.

Thirty-year TIPS yielded 0.58 percent ahead of today’s auction, versus 0.479 percent at the last sale of the securities in October.

The Treasury is also scheduled to announce today the sizes of three note sales scheduled for next week.

The U.S. will probably auction $35 billion of two-year debt on Feb. 25, the same amount of five-year notes the following day and $29 billion of seven-year securities on Feb. 27, according to Wrightson ICAP LLC, an economic advisory company based in Jersey City, New Jersey.

In a sign of demand for inflation insurance among some investors, 10-year TIPS yielded minus 0.56 percent. The yield has been negative for almost 13 months.

The difference between rates on 10-year notes and same-maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, was 2.55 percentage points. The average over the past decade is about 2.2 percentage points.

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