Investors are increasingly giving up on hyperinflation bets. For example, investors are willing to buy standard U.S. treasury bonds that pay just 3.69% yield. That doesn’t leave room for much inflation.
And while previously one could argue away low treasury yields by blaming profit-blind foreign central bank buying from counties such as China and Japan, it’s not so easy now.
The niche market of Treasury Inflation Protected Securities (TIPS, bonds that adjust their yield to inflation) is giving up on its inflation concerns as well. As this market is too small for major central bank investment, it’s far harder to argue away the lack of inflation it forecasts.
Treasury Inflation-Protected Securities are posting the biggest losses since Lehman Brothers Holdings Inc. collapsed in 2008 as investors say they’re too expensive when consumer prices are barely rising.
Blackrock Inc., Pacific Investment Management Co. and FAF Advisors Inc., which oversee about $4.5 trillion, are selling TIPS, contributing to a 1.1 per cent loss this month after they gained 1.5 per cent in January and 10 per cent in 2009. The bonds are on pace for their worst month since falling 8.47 per cent in October 2008, the month after Lehman went bankrupt.
Investors who were piling into TIPS as recently as four months ago on concern that a recovering economy and $8.2 trillion of U.S. stimulus spending would ignite inflation are reversing course. They see little need to protect against price increases as the dollar rallies, banks restrict credit and expanding government deficits around the world threaten to slow global growth.
“I’ve been a pretty aggressive seller in the last month or so,” said Mihir Worah, who manages Newport Beach, California- based Pimco’s $15.6 billion Real Return Fund, the largest TIPS fund. “Over the next year I see inflation south of 1 per cent.”
Thus so far, within the realm of inflation at least, Ben Bernanke’s easy-money policies have been proven correct. His thinking was that due to massive over capacity and asset price deflation in the U.S. economy post-crisis, he could prevent deflation and stimulate the economy without the threat of inflation. So far he’s done just that, and now he’s begun tightening.