Buy TIPS Amid Risk Inflation Will Outpace Fed Target, Pimco Says

Investors should buy bonds that protect against inflation amid the risk consumer-price gains will exceed the Federal Reserve’s target, according to Pacific Investment Management Co.

While Pimco’s main scenario is for global inflation to only increase gradually, the chance it will exceed central banks’ targets is much greater than that of deflation, Mihir Worah, who helps manage the company’s $107.3 billion Total Return Fund wrote in a note. That’s particularly true in the U.S., where accelerating price gains are a “very real possibility,” he said.

Treasury Inflation Protected Securities are “attractively priced in the current environment, probably because many market participants are still stuck in the past when they were more justifiably worried about deflation or ‘lowflation,’” Worah wrote. “TIPS prices, in our view, reflect an insufficient risk premium.”

U.S. inflation-protected debt has returned less than 0.1 percent this year, compared with a decline of 0.4 percent for conventional Treasuries, after underperforming them for the previous two years, according to Bank of America Merrill Lynch Indexes.

Ten-year TIPS yielded 0.44 percent at 10:31 a.m. in Tokyo, compared with 2.37 percent for the regular 10-year note.

The 10-year break-even rate, which measures expectations for inflation during the next decade, was 1.92 percent, increasing from 1.49 percent in January, the lowest since August 2010. The Fed targets an inflation rate of 2 percent.