Short-Lived
Nominated by President Barack Obama on Oct. 9, Yellen told Congress on Nov. 14 that maintaining price stability was key to the Fed in its support of the economy.
Those gains have since evaporated. The 2.2 percent loss since the end of October was almost double the slump for all of 2008, the only other year that the securities fell, index data compiled by Bank of America show.
The 10 largest inflation-indexed mutual funds, including those from Vanguard Inc., Pacific Investment Management Co. and BlackRock, have lost 36 percent of their assets since the start of May, shrinking to $62.7 billion by the end of November, according to data compiled by Morningstar Inc.
“When inflation is falling or extremely low, TIPS are not a great investment vehicle,” Gary Pollack, the New York-based head of fixed-income trading at Deutsche Bank AG’s private wealth management unit, which oversees $12 billion, said in a Dec. 11 telephone interview. “I’m avoiding TIPS. I don’t see inflation becoming an issue over the next three to six months.”
Mispriced Risk
The gap between yields on TIPS and fixed-rate Treasuries show that traders anticipate inflation will average 1.75 percent in the next five years. That’s plummeted from this year’s high of 2.42 percent in March.
Cost-of-living increases will average 1.5 percent this year, according to economists surveyed by Bloomberg, the least since prices fell in 2009 and the second-lowest reading since 1963. Consumer prices rose by 1 percent in October from a year earlier. The rate compares with a three-year high of 3.9 percent in September 2011.
William Irving, a fixed-income manager at Fidelity Investments, which oversees $1.8 trillion, said inflation will probably accelerate over time as the Fed’s purchases of $85 billion of debt each month spurs more growth, indicating that TIPS are attractive after the rout.
U.S. economy expanded at an annual rate of 3.6 percent in the third quarter, the strongest pace since the first quarter of 2012, a government report on Dec. 5 showed.