Smaller price increases have fixed-rate U.S. government bonds more attractive relative to TIPS. After adjusting for inflation, yields on 10-year Treasuries reached 1.91 percent this month, the highest since February 2011. The nominal yield on the 10-year note was at 2.87 percent last week.
Dollar Strength
The dollar is forecast to strengthen against all nine other Group-of-10 currencies next year, extending the best annual gain since 2008. The dollar will appreciate 4.4 percent versus the yen and 6.9 percent against the euro in 2014, according to data compiled by Bloomberg.
The gains may bolster demand from foreigners who own about 50 percent of U.S. government’s debt obligations and temper any selloff when the Fed tapers. Their purchases of Treasuries have helped financed deficits as increased government spending since the credit crisis more than doubled the amount of U.S. debt outstanding to a record $11.8 trillion.
The Fed will probably start curtailing its own purchases at its two-day meeting starting tomorrow, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, an increase from 17 percent in a Nov. 8 survey. Forty percent of the 35 economists surveyed predict tapering in March.
Disinflation in the U.S. has confounded the predictions of a group of economists and investors who signed a letter warning Bernanke on Nov. 15, 2010, that the Fed’s quantitative easing would fuel inflation and cause the dollar to depreciate.
Reality Check
The 23 people included John Taylor, the Stanford University professor and former undersecretary of Treasury for international affairs, and Clifford S. Asness, head of AQR Capital Management LLC, the Greenwich, Connecticut-based hedge fund that oversees about $79 billion.
For Wan-Chong Kung, who oversees $325 million of inflation- linked securities at Nuveen Asset Management in Minneapolis, the temporary jump in inflation expectations as Yellen became the favorite to lead the Fed demonstrates the danger of anticipating price gains before they actually emerge.
After avoiding TIPS for a year, Kung began buying in September. She has since pared those stakes and returned to being skeptical of their value.