Gundlach Says TIPS ‘for Winners’ Amid Signs Inflation Reviving

  • Bond market’s inflation expectations touch highest since May
  • TIPS have outperformed nominal Treasuries, U.S. stocks in 2016

The Inflation Sensation Making Investors Think Twice

Jeffrey Gundlach, who in late 2014 said “TIPS are for losers,” now views Treasury Inflation Protected Securities as a good investment amid rising inflation.

“I like TIPS,” Gundlach, chief executive officer of DoubleLine Capital, said at a conference in San Diego Tuesday. “TIPS are for winners.”

The securities have returned 7.5 percent in 2016, compared with a 4.5 percent gain for nominal U.S. sovereign debt, Bank of America Corp. indexes show. That also tops the 6.7 percent return for the S&P 500 Index, including reinvested dividends. Gundlach warmed up to TIPS this year and is among a group of investors, including Pacific Investment Management Co. and Goldman Sachs Asset Management, that see the outperformance continuing.

The yield on benchmark Treasury 10-year notes rose three basis points, or 0.03 percentage point, to 1.78 percent as of 9:37 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 fell 1/4, or $2.50 per $1,000 face amount, to 97 14/32.

The difference between yields on 10-year notes and similar-maturity TIPS, which shows investor expectations for average annual consumer-price gains over the period, reached 1.71 percentage points, the highest since May.  

“The cyclical low for inflation rates has almost certainly past,” said Peter Jolly, the global head of markets research at National Australia Bank Ltd. in Sydney, who predicts headline consumer-price gains in the U.S. will rise above 3 percent early next year if oil prices remain at current levels. “That will help change market perceptions of inflation ahead, and put to rest deflation fears for now.”

Australian fixed-income traders dropped bets for central bank easing in the coming year after data on Wednesday showed third-quarter inflation had quickened more than economists expected. That came after a report last week showed U.S. annual consumer-price gains reached the strongest pace since 2014 in September, while both U.K. and euro-area inflation rates are accelerating.

For more of what Gundlach said Tuesday, click here.

As well as a rebound in oil after OPEC in September agreed to cut supply for the first time in eight years, Federal Reserve Chair Janet Yellen this month set out an argument for keeping policy accommodative, even as traders prepare for higher interest rates come December.

Gundlach said last month TIPS were becoming a more attractive option for investors who want to own longer-term government bonds, though he hadn’t begun buying them himself.

Gains After Losses

Pimco started 2016 by recommending the securities, in a continuation of a long-standing view. Goldman Sachs Asset Management wrote in a note to clients last week it was taking a long position in the securities on the expectation that inflation will pick up gradually. TIPS delivered a loss of almost 7 percent in the three years ended Dec. 31, 2015, compared with a 3.3 percent gain for nominal Treasuries.

The U.S. will auction $34 billion of five-year nominal notes and $15 billion of two-year floating-rate debt on Wednesday.

Morgan Stanley abandoned a prediction that U.S. break-even rates will fall earlier this month, after recommending a bearish position in July.

“The perception of inflation is already coming through in the global economy,” Paul Donovan, the global chief economist at UBS Group AG, said in an interview on Bloomberg Television Wednesday. “It’s too late to talk about inflation pressures. We’re already there.”

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