At a time when the bond market expects inflation to stay at about the past decade’s average, the biggest buyers of government debt say they need protection from rising consumer prices as central banks focus on growth.

Pacific Investment Management Co. and Invesco Ltd. say growing central-bank tolerance of inflation means securities with interest or principal tied to consumer prices are the ones to own. Global expectations indicated by the gap between yields on so-called linkers and government bonds reached a 21-month high of 1.70 percent, Bank of America Merrill Lynch indexes show.

Economists in Bloomberg surveys forecast consumer-price gains of 2.72 percent in 2013, in line with the 10-year average.
After four years of stimulating economies, central bankers are starting to see signs of accelerating growth, spurring some bond investors to prepare for a rise in yields from record lows. Index-linked securities are favored because sovereign-debt returns are being erased by what little inflation there is.

“There’s an element of central banks, whether they say it or not, being more relaxed about allowing inflation to rise,” Paul Mueller, a London-based fund manager at Invesco Asset Management, a unit of Invesco Ltd., which manages $713 billion, said in a telephone interview Feb. 19. “While I don’t think we are going to see inflation escaping to very high levels, it does make sense to have protection.”

Global Stimulus

Policy makers from the Federal Reserve to the Bank of England to the Bank of Japan pumped more than $3.5 trillion into economies to stimulate growth during the five years following the start of the deepest global slump since World War II. Global gross domestic product will expand almost 2.4 percent this year, from 2.2 percent in 2012, a Bloomberg composite of economist estimates shows, increasing speculation that inflation will also start rising.

Investors seeking insurance against future price rises have helped inflation-protected issues in developed markets outperform regular securities by 0.25 percentage points this year through Feb. 20, according to Pimco indexes. Linkers have beaten non-indexed bonds in the U.K., Japan, Germany, Italy, Sweden, Australia and New Zealand.

Securities with maturities of 10 years or more across the G-10, except Japan, are losing out to shorter-dated debt as investors demand more compensation for the risk of inflation, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Bond Yields

U.S. Treasury Inflation-Protected Securities, or TIPS, have lost 1.32 percent this year as Treasuries declined 1.3 percent, according to the Barclays U.S. Inflation-Linked Bond index and the Barclays U.S. Government Comparator Bond Index, which is adjusted to reflect the longer duration of TIPS. They returned 7.26 percent in 2012, compared with 3.3 percent for the duration-adjusted government bond index.

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