Barclays, HSBC Say Warsh Makes Inflation-Linked Debt Appeal

55o6i)r9(yp[d29fu(u67oxc_media_dl_1.png Bloomberg

Article content

(Bloomberg) — Barclays Plc and HSBC Holdings Plc say concern the Federal Reserve is dragging its feet on inflation is giving investors another reason to buy bonds that offer protection from accelerating price growth.

Article content

Long-maturity US yields hit their highest in almost two decades last week as Fed Chairman Kevin Warsh’s refusal to say how policy makers will control inflation fueled worries the central bank may act too late — even though he’s been adamant about keeping a lid on price growth.

Article content

Article content

Article content

That came on top of wild swings in oil markets and concerns about government spending. At the same time, breakeven rates, which measure inflation expectations, are close to their lowest in a year.

Article content

Article content

“I’d expect the market to price greater inflation risk into the curve, following what’s been interpreted by the market as a ‘dovish hold’ with questionable credibility,” Jon Hill, head of US inflation market strategy at Barclays. “That would mean wider breakevens, and inflation-linked bonds outperforming conventional ones.”

Article content

After the Fed meeting, HSBC’s Dhiraj Narula reiterated a recommendation on long-maturity US bonds that protect against price growth, citing concern about the US central bank’s “longer-run commitment to inflation control.”

Article content

Bond Investors Revive Old Trade as Inflation Shapes Outlook

Article content

While a Bloomberg gauge tracking inflation-linked debt is up 0.3% this year that’s still a better showing than the 0.7% loss for an index of conventional sovereigns in the period.

Article content

Inflation-linked bonds shield investors by paying a yield that’s adjusted higher to account for the inflation rate. The so-called real yield — which doesn’t include that adjustment — is currently at 2.93% for 30-year US Treasury Inflation Protected Securities, having peaked at 3.04% on Friday, the highest since 2008.

Article content

Article content

‘Offering Value’

Article content

“We still view inflation-linked bonds as offering value at current real yields,” said Jorge Garayo from Societe Generale SA. The chances of a comprehensive Middle East peace are “highly unlikely,” he said, and low inflation breakevens show the market is “complacent” about the possibility of higher energy prices feeding through into prices and wages. 

Article content

Elsewhere, Kevin Kidney has boosted True Potential Investments LLC’s inflation-linked sovereign holdings to about 20% of the firm’s total fixed-income investments. He worries central banks, and the US Federal Reserve in particular, are happy to accept a faster pace of price growth.

Article content

“We believe that central banks are willing to accommodate a higher level of inflation than they communicate,” Kidney said. 

Article content

Stefan Koopman, senior macro strategist at Rabobank puts it another way: “The investment case for inflation-linked bonds is not simply that inflation stays above 2%,” he said. “Rather, it’s that 2% may increasingly act as a floor rather than a ceiling.” 

Article content

Warsh Hints at New Inflation Roadmap, Stoking Investor Angst

Article content

(Adds SocGen comments in eighth paragraph.)

Article content