History is repeating itself in the bond market as investors capitulate on bets that the Federal Reserve’s money-printing efforts will spark faster inflation.
Firms from U.S. Bancorp to Federated Investments that had been buying government securities that protect against rising consumer prices during the Fed’s recent efforts to inject cash into the economy are now selling. For the first time since the depths of the financial crisis in 2008, mutual funds that target Treasury Inflation-Protected Securities have seen outflows for three straight months, according to Morningstar Inc.
Even after the Fed injected more than $2.3 trillion into the financial system since 2008, inflation is under control, bolstering the appeal of bonds while providing the central bank with more scope to provide stimulus as needed to foster the economic recovery. Commodity prices are down and wages have grown just 1.9 percent on average since 2009, below the 3.1 percent in the prior three years, government data show.
“With such weak labor markets, flat income growth and flat wages, and commodities weak, we just won’t see the inflation that the TIPS market is pricing in,” Dan Heckman, a fixed- income strategist at the U.S. Bank Wealth Management unit of U.S. Bancorp, which manages $110 billion, said in telephone interview April 9.
No ‘Believer’
After buying TIPS through December, the Minneapolis-based firm has been selling the securities. TIPS have suffered a sell- off during each of the past five years even though the Fed has pumped more than $2.5 trillion into the economy through its bond purchase programs in a policy known as quantitative easing.
“We’ve been told to expect inflation every year for the last four years and it hasn’t happened,” James Kochan, chief fixed-income strategist at Wells Fargo Funds Management LLC in Menomonee Falls, Wisconsin, said in an April 10 telephone interview. “I’m not a big believer that you have to buy inflation protection here.” Kochan said he has been advising investors to sell TIPS.
Current yields on such bonds due in five years mean investors would only profit if the consumer price index rises more than 2.18 percent annually. The principal on inflation- linked debt rises in tandem with the increase in the CPI.
The gauge will increase 1.9 percent this year and 2.1 percent in 2014, according to the median forecast of 74 economists in a Bloomberg survey. The median forecast is for a 2.2 percent rise in 2015.
Fed Index