A pickup in inflation—and the market’s perception of higher prices—could be a big factor in driving up interest rates, according to two top bond gurus speaking Thursday at the Inside Fixed Income conference in Newport Beach, Calif., sponsored by Inside ETFs.
And higher inflation makes TIPS an attractive investment, they said.
“The Fed [Wednesday] said inflation is increasing," said Jeffrey Rosenberg, chief fixed-income strategist at BlackRock. “There’s an inflation trend emerging in our economy. And the investment implication is that rates are rising, not because of an aggressive Fed, but because inflation expectations are rising.”
“We’re starting to see the [deflationary] effects of commodities rolling off” the inflation indexes, which will end some of the downward drag on inflation measures, said Jeffrey Sherman, deputy chief investment officer at DoubleLine Capital, also speaking at the conference.
Average hourly earnings are moving up, with higher minimum wages coming soon in some states, Sherman added, also helping to drive up inflation.
But don’t worry about out-of-control price increases. “It’s not an inflation story, it’s a reflation story—going from around 1.5 percent to 2 percent,” Rosenberg said. The mild reflation is something the deflation-wary Fed wants to see happen.
With inflation creeping up and possibly driving rates higher, TIPS look attractive, Sherman and Rosenberg said.
“TIPS protect more with rising inflation” than Treasurys with nominal yields, Rosenberg said.
Sherman agreed, noting that DoubleLine has added TIPS to its portfolios over the past two months.
Meanwhile, the central banks’ experiment with negative rates is over, said Rosenberg, who is predicting a rise in rates and steeper yield curves globally.
Sherman said the market believes the anticipated rate rise by the Fed in December is being seen as a “one and done” move, and appears to be factored into the bond market already.