Consumer prices will increase less than the Fed’s target of 2 percent annually for at least three years, based on bond trading. The so-called break-even rate, or the gap between yields on Treasury Inflation-Protected Securities and fixed- rated Treasuries, indicates that inflation will rise an average 1.4 percent through 2016.
Debt Demand
“Given how sluggish things are with households and the fact that you need more demand, they should really be keeping both feet on the accelerator,” Tipp said by telephone from Newark, New Jersey. “The economy is not rip-roaring. It would make sense to push back tapering for at least a year.”
The Fed is also considering standards that by 2017 will require the biggest U.S. banks to hold enough easily sold assets to survive a 30-day drought, a move that would compel the nation’s lenders to purchase more Treasuries.
Demand for Treasuries at government debt actions increased in successive months for the first time in a year, as bids exceeded the amount of coupon debt sold in October by 2.85 times, the most since May.
Americans, who have the least amount of debt since 2002, are also holding more cash and investing their disposable income in bonds rather than spending, according to FTN Financial. That’s holding back growth in the U.S. economy and spurring more demand for Treasuries as the Fed maintains its bond buying, Jim Vogel, a Memphis, Tennessee-based interest-rate strategist at FTN, wrote in a report on Oct. 25.
“I would not have wanted to add too much” to our Treasury holdings a few weeks ago, said Jeffery Elswick, who oversees about $4.5 billion of fixed-income assets at San Antonio-based Frost Investment Advisors LLC and manages the Frost Total Return Bond Fund, which has beaten 95 percent of peers in the past three years. Now, “we have been recommending over the last week or so adding to Treasury positions.”