And even for inflation believers, TIPS have their drawbacks, having only been around since 1997, and remaining relatively illiquid versus nominals. TIPS were among the hardest to trade government securities as the pandemic roiled markets in March, in part because they account for just $1.5 trillion of the $20.4 trillion Treasurys universe and tend to be favored by long-term buy-and-hold investors.
But the narrative may start to change should distribution of a vaccine begin, according to Mark Nash, head of fixed-income alternatives at Jupiter Asset Management.
“We are still into inflation bonds in a big way,” he said. “If you have a Q1 rollout for the vaccine, and central banks as well as governments staying generous with their policies, then boom, we’ll get some confidence back. These bonds will be a must-own when things clear up.”
Headwinds Abound
Not everyone shares that view. There are immediate headwinds to consider, with surging coronavirus cases spurring another round of lockdowns in many countries, millions of people still out of work and a range of pandemic-relief programs set to expire in the U.S.
For Jason Bloom, a global strategist at Invesco Advisers, the market is ahead of itself in expecting stronger growth right away.
“You likely wouldn’t start to see economic activity pick up to the point of generating inflation until we get into the end of 2022,” he said. “The vaccine news absolutely didn’t change anything regarding our inflation outlook.”
Winning Bets
Those investors who are convinced the stage is set for the next step in the economic recovery are sticking with their winning bets.
Gemma Wright-Casparius, a senior portfolio manager at Vanguard, which oversees about $6.2 trillion, scaled back TIPS wagers last quarter after the rebound in breakevens. She expects to add more ahead.
“We’re looking for opportunities to re-engage because we do think the vaccine is a game changer,” she said. “Depending on how widespread its adoption and durability is in terms of immunity, we could close the output gap faster than is now expected.”
Inflation expectations got a jolt this year from the Fed’s pledge to keep supporting the economy until inflation measures are consistent with an average of 2% over time. And with talks over additional fiscal stimulus stalled out, most see the Fed doing more, even as soon as December.
Bob Miller, head of Americas fundamental fixed income at BlackRock, which manages over $7 trillion as the world’s biggest asset manager, says the firm came into the year long TIPS, in the 5- to 10-year sector, and added more when the securities got crushed during the March-April period.
Miller helps oversee the Total Return Fund, which has gained 8% this year to beat about 80% of its peers, according to data compiled by Bloomberg. He took profits on intermediate-maturity TIPS and is now long the 30-year security.
The 30-year breakeven at about 1.89% signals too much pessimism for Miller. That’s because TIPS are tied to consumer prices, and CPI has historically exceeded the inflation gauge the Fed targets by about 40 basis points. So the current breakeven rate implies the Fed will miss its 2% target by about half a percentage point on average over the next 30 years. As Miller sees it, such a big miss seems unlikely.
“I share some modest skepticism about the Fed’s ability to pin the tail on the donkey at 2% for a long period of time,” he said. “But I would not underestimate their willingness to try.”
This article was provided by Bloomberg News.