The roster of firms lining up to recommend Treasury inflation-protected securities before a sale of the debt on Thursday is starting to look like a "who's who" of bond giants.
BlackRock, Fidelity Investments and Pacific Investment Management Co., which oversee almost $9 trillion combined, have all issued warnings that consumer-price gains will accelerate and are endorsing TIPS after President-elect Donald Trump's victory. DoubleLine Capital's Jeffrey Gundlach and Goldman Sachs Asset Management began recommending the securities last month, amid signs costs in the economy were picking up.
While U.S. inflation has trailed the Federal Reserve's 2% target for more than four years, Mr. Trump's infrastructure spending pledges are fueling expectations of a pickup. TIPS have returned 4.8% this year as of Nov. 15, vs. 1.7% for nominal Treasuries, based on Bloomberg Barclays index data. The outcome of the $11 billion 10-year TIPS auction Thursday will offer a verdict on the staying power of the reflation trade, in the face of global headwinds including tepid economic growth in Europe.
Benchmark Treasury 10-year note yields declined 3 basis points to 2.2% as of 6:12 a.m. in New York, according to Bloomberg Bond Trader data. The 2% security due in November 2026 rose 1/4, or $2.50 per $1,000 face amount, to 98 1/4.
"After this election year, it's likely that the inflation will move higher — fiscal stimulus and protectionism are inflationary," said Mihir Worah, co-manager of the $83 billion PIMCO Total Return Fund. TIPS “will outperform Treasuries again next year."
A bond market gauge of expectations for U.S. consumer prices over the next decade climbed this week to the highest since April 2015. The measure, known as the break-even rate, which represents the extra yield investors demand on regular 10-year notes over similar-maturity TIPS, reached 1.97 percentage points. The difference has risen from below 1.2 percentage points in February. The debt pays interest on a principal amount that rises with consumer prices.
The president-elect's pledges include tax cuts and spending $500 billion or more over a decade on infrastructure, a combination that's seen as spurring quicker growth and inflation in the world's biggest economy. Mr. Trump has also blamed China and Mexico for American job losses and threatened punitive tariffs on imports.
The Wall Street consensus is for inflation to accelerate. The U.S. consumer-price index will climb to 2.2% in 2017, from 1.2% this year, according to the median forecast of economists surveyed by Bloomberg.
“TIPS have an important place in portfolios today,” Rick Rieder, chief investment officer for global fixed income at BlackRock, which oversees $5.1 trillion, wrote in a report after the election. “We are probably going to see a significant shift from monetary policy stimulus to fiscal policy initiatives. This may well aid in accelerating the pick-up in inflation.”
PIMCO, which oversees about $1.5 trillion, has been warning about the prospect of inflation since last year. It reiterated its TIPS recommendation after Mr. Trump's surprise victory in the Nov. 8 vote. Mr. Gundlach, co-founder of DoubleLine Capital in Los Angeles, who predicted Mr. Trump's election, recommended TIPS in October. Goldman Sachs Asset Management did the same last month.
There are some forces that may restrain inflation. For one thing, the dollar is surging as bets mount on a quicker pace of Fed rate increases. A gauge of the greenback against 10 major peers reached the highest since February on Wednesday, raising the prospect that a stronger U.S. currency will keep down import prices. The economic momentum at home may also be buffeted by limp global demand.