The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has increased to 1.56 percentage points from as low as 1.12 on Feb. 11. It’s still below its average of 2.08 for the past decade.
“Inflation expectations have increased recently with commodity prices,” said Will Tseng, a bond manager in Taipei for Mirae Asset Global Investments Co., which oversees $73 billion. “The risk is that the Fed will get more hawkish.” Tseng said he’s selling emerging-market bonds to trim his holdings of riskier securities and holding the proceeds in cash. He’s avoiding buying more Treasuries in case Fed comments send yields higher, he said.
The Fed’s preferred inflation gauge rose 1 percent in February, a report showed Monday, half of the central bank’s target of 2 percent.
“We may well at present be seeing the first stirrings of an increase in the inflation rate -- something that we would like to happen,” Fischer, vice chairman of the Fed Board of Governors, said this month.
Policy makers should consider increasing interest rates in April in reaction to a tightening labor market and the prospect of inflation overshooting the 2 percent target, Fed Bank of St. Louis President Bullard said March 23. He said in separate comments inflation hasn’t materialized as he expected. Fischer and Bullard both vote on monetary policy this year.
The central bank’s next meeting is April 26-27. It probably won’t raise rates until September, futures contracts indicate.
“We like Treasury Inflation Protected Securities,” Pimco’s Worah said in a video on the company’s website this month. “The market is pricing 1 percent inflation in the United States for next year. We think it’s likely to be closer to 2 percent.”