“I’m not looking for the inflation genie to get out of the bottle,” Jack McIntyre, a Philadelphia-based money manager at Brandywine Global Investment Management LLC, which oversees $45 billion, said by telephone on Nov. 7.
Investors have responded by seeking out longer-term Treasuries to reap the biggest inflation-adjusted returns and shifting way from the shortest-term notes as they anticipate the end of the Fed’s six-year-long policy of near-zero rates.
ETF Exodus
Last week alone, the iShares 20+ Year Treasury Bond ETF, the $5.2 billion exchange-traded fund, had more than a half- billion dollars of net inflows, data compiled by Bloomberg show. That’s the most for a week since June and adds to the $507 million the ETF accumulated last month.
The $10.4 billion iShares 1-3 Year Treasury Bond ETF has lost more than 10 percent of its assets after 13 straight days of withdrawals through last week, the longest stretch since the fund began in 2002, the data show.
Another reason longer-term Treasuries remain in demand is because of deepening concern that growth is unlikely to match previous expansions, said Gregory Whiteley, a money manager at DoubleLine Capital LP, which oversees $56 billion.
Since the recession ended in 2009, the economy has expanded at an annual rate of 1.8 percent on average. In the prior three expansions, growth averaged more than 3 percent.
Bond Bull
“There’s no compelling reason to believe in the prospect of higher yields,” he said by telephone from Los Angeles on Nov. 6. Whiteley, who bought Treasuries as recently as last month, said he maintains an “overweight” position.
Martin Hegarty, the head of inflation bond portfolios at BlackRock Inc., says there’s plenty of evidence the economy is on the cusp of generating levels of growth and inflation that have been absent during the five-year-long expansion.
The jobless rate declined to 5.8 percent in October, the lowest since July 2008. The lowest costs at the gas pump in four years may also help spur buying power and household purchases heading into the U.S. holiday-shopping season after consumer confidence jumped to a seven-year high in October.
“The unemployment rate is coming down and spare capacity is being eroded,” Hegarty at BlackRock, which oversees more than $4 trillion, said by telephone Nov. 5. He expects core consumer prices, which exclude food and energy costs, will rise as much as 2.5 percent in the first quarter of 2015. The last year core inflation averaged more than 2 percent was 2006.
Win-Win
Fed officials also said in last month’s policy statement that survey-based measures for longer-term inflation have remained stable and suggested that market-based indicators were being pushed down temporarily by energy prices. Expectations for inflation over the next decade average 2.2 percent, the Philadelphia Fed’s survey of forecasters shows.
For Vince Foster, a money manager and interest-rate strategist at Southern Bancorp, which has $1.2 billion in assets, the Fed’s resolve to raise rates ultimately benefits longer-term bonds the most by stamping out any risk that prices will accelerate beyond the central bank’s ability to control.
The rally in 30-year bonds this year has already reduced the extra yield investors demand versus two-year notes to 2.53 percentage points, the least since 2012.
Tighter Fed policy translates “into a flatter yield curve,” he said by telephone from Little Rock, Arkansas, on Nov. 6. That means “I am much more willing to hold duration if I don’t have to worry as much about a spike in inflation risk.”