Goldman Asset Likes Inflation Bonds Amid Best Rally Since 2012

  • Inflation bonds returned 6.9% in U.S. this year, 31% in U.K.
  • Australia, Japan, U.S. are selling long-term debt this week

Goldman Sachs Asset Management is recommending Treasury Inflation Protected Securities as the bond market signals consumer prices are poised to rise.

“We like them a lot,” Mike Swell, co-head of global portfolio management for fixed income in New York, said in an interview on Bloomberg Television Tuesday. “Investors are catching up to what a lot of us in markets already know, that inflation is picking up.” The firm invests or advises on more than $1 trillion of assets, according to its website.

TIPS have returned 6.9 percent in 2016, heading for their biggest annual gain since 2012, according to Bank of America Corp. indexes. Nominal Treasuries have risen 4.3 percent.

The benchmark U.S. 10-year note yield rose one basis point to 1.78 percent as of 7:01 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 fell 1/8, or $1.25 per $1,000 face amount, to 97 1/2.

Australia’s 10-year yield climbed five basis points to 2.30 percent. The levels in both nations reached the highest since June.

Inflation Outlook

The difference between yields on U.S. 10-year notes and similar-maturity TIPS, a gauge of expectations for U.S. consumer prices, expanded to 1.69 percentage points on Tuesday, approaching the Federal Reserve’s inflation target of 2 percent. The spread has increased from as little as 1.12 points in February.

U.S., Japanese and European central bankers have resorted to unprecedented monetary stimulus to try to boost inflation in their economies. Europe and Japan are using negative interest rates, while the Federal Reserve has raised its benchmark interest rate only once since cutting it to a record low near zero in 2008. The Fed is scheduled to publish the minutes of its September policy meeting Wednesday.

Rising oil prices are feeding forecasts for consumer prices to rise, with crude oil climbing to its highest closing level this week in more than a year. Inflation in the Group of Eight nations will be 1 percent this year and 1.9 percent in 2017, based on Bloomberg surveys of economists. The figure was as high as 3.75 percent in 2008 before the global financial crisis.

‘Easy Policy’

“Some investors have interest in U.S. TIPS or U.K. TIPS,” said Wontark Doh, head of overseas fixed-income investment in Seoul at Samsung Asset Management, which oversees $200 billion and is South Korea’s biggest private money manager. “There is pressure of inflation due to easy policy and rising commodity prices.”

U.K. inflation bonds have returned 31 percent this year, compared to 12 percent for nominal debt in the nation, the Bank of America data show.

The U.S., Japan and Australia are all selling long-term debt this week. The securities are more sensitive to the outlook for inflation than shorter-dated debt.

Australia sold A$7.6 billion ($5.8 billion) of 30-year bonds Wednesday, its first offering of the maturity. Demand rose at a 30-year offering in Japan, where the central bank and government are battling deflation, rather than inflation. The U.S. is scheduled to auction three- and 10-year debt Wednesday, and 30-year bonds Thursday.

Investors preparing for faster inflation and a Fed rate increase have sent long-term Treasuries reeling. U.S. government securities due in a decade and more have handed investors a 2.65 percent loss in October, headed for their steepest monthly decline in a year, Bloomberg World Bond Indexes show.

“The first asset class you want to be concerned about is just nominal Treasuries,” Goldman Sachs Asset’s Swell said. Investors can expect a "somewhat significant" increase in
nominal bond yields, he said.

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