Yields on U.S. 10-year notes dropped last week by four basis points to 1.96 percent amid speculation the Fed’s asset purchases may support bond prices, according to Bloomberg Bond Trader data. The benchmark 2 percent note due in February 2023 rose 11/32 or $3.44 per $1,000 face amount, to 100 10/32. The yield on 10-year TIPS due January 2023 dropped on the week to negative 0.57 percent.
Ten-year notes yielded 1.98 percent and the TIPS rate was negative 0.56 percent as of 08:10 a.m. New York time.
BlackRock Picks
“One should be looking to own inflation-linked bonds rather than nominal bonds and that argument is more compelling the further out the curve you go,” Martin Hegarty, the co-head of BlackRock Inc.’s inflation-linked bond funds, which holds more than $28 billion of assets, said in a telephone interview Feb. 20.
Hegarty, whose company oversees $3.8 trillion as the world’s largest money manager, favors inflation-linked debt with three- to seven-year maturities in Germany, Italy and the U.K. He is also buying TIPS with maturities of one to two years, even though BlackRock doesn’t anticipate any immediate jump in consumer prices unless there is a surge in energy costs.
The global break-even rate, a measure of inflation expectations, is at 1.64 percentage points, compared with a 10- year average of 1.2 percentage points and a peak of 2.14 percentage points in July 2008, Bank of America Merrill Lynch indexes show.
The break-even rate in the U.S. was as high as 2.61 percentage points this month, from 2.24 percentage points Sept. 4. It rose to 2.73 percent on Sept. 17, four days after the Fed announced an open-ended bond buying plan to keep pumping funds into the financial system, the highest since May 2006. The central bank announced the additional Treasury purchase program of $45 billion per month on Dec. 12.
‘Good Time’
“It’s a good time to seek inflation protection,” Craig Veysey, the head of fixed income at Sanlam Private Investments Ltd. in London, part of the Sanlam Group which oversees $72 billion of assets, said by phone Feb. 12. “Central banks, which for years have been trying to keep inflation at a relatively low level, now understand they need to do much more. I’m not saying inflation is likely to rise sharply. The market has not sufficiently priced in the risk.”
U.S. consumer prices rose 1.6 percent in January from a year earlier, the Labor Department reported Feb. 21. Inflation averaged 2.5 percent over the past decade.