Inflation-Protected Bonds Diverge With Forecasts for 1.7% Rise in Prices

There has been no better place in the U.S. government bond market since 2008 than in debt that protects against faster inflation. Now, traders say the securities may be poised to fall as consumer prices rise too slowly to justify the gains.

Treasury Inflation-Protected Securities returned 17 percent the last two years, compared with gains of 1.9 percent in Treasuries, Bank of America Merrill Lynch indexes show. Yields on 10-year TIPS show bondholders expect the consumer price index to increase 2.17 percentage points a year on average over the life of the debt. The rate rose 1.5 percent in 2010 and is forecast to climb 1.7 percent this year, based on a Bloomberg survey of more than 60 economists.

“We’re nowhere near any inflationary type of levels,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s private wealth unit in New York. “There’s a lot of slack in the U.S. economy, especially in the labor market. It’s too soon to get too bullish on TIPS.” (more)