Morgan Stanley recommended Treasury Inflation Protected Securities, following inflation warnings from BlackRock Inc., Pacific Investment Management Co. and Bill Gross.
The New York-based primary dealer, one of the 22 that trade with the Federal Reserve, said policy makers are “decidedly dovish,” as they try to spur growth. Fed Chair Janet Yellen said last week officials need to be cautious in raising interest rates, underpinning speculation she wants the economy to pick up before tightening monetary policy. The central bank plans to publish the minutes of its March meeting on April 6.
The difference between yields on 30-year bonds and similar-maturity Treasury Inflation Protected Securities has widened to 1.8 percentage points from as low as 1.4 in February. The gauge, which measures trader expectations for consumer prices over the life of the debt, is still less than the average of 2.3 for the past decade.
“We continue to like being long 30-year TIPS,” according to an April 1 report from Morgan Stanley analysts including Matthew Hornbach, head of global interest-rate strategy. “Yellen suggested that the current stance of policy was consistent with modestly higher-than-potential growth and further improvement in the labor market. In short, policy is easy.”
The 10-year Treasury note yield was little changed Monday at 1.76 percent as of 6:35 a.m. in London, based on Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 was 98 26/32.
In January 2015, with the 10-year yield at about 1.95 percent, Morgan Stanley predicted it would jump to 2.85 percent by Dec. 31. The yield ended last year at 2.27 percent.
The central bank opted against raising rates at its March meeting. “The Fed made a decision that will let inflation run hotter, that will let employment run hotter,” Rick Rieder, chief investment officer of global fixed income at New York-based BlackRock, said following the session.
BlackRock, the world’s largest money manager with $4.6 trillion in assets, recommended TIPS as recently as last week. Pimco’s Mihir Worah, one of the three managers for the $87.8 billion Total Return Fund, said the company likes TIPS in a video on the company’s website last month.
Gross, who built the world’s biggest bond fund at Pimco and is now at Denver-based Janus Capital Group Inc., said aging U.S. baby boomers will drive inflation higher in coming years.
“When the demographics kick in, when the boomers really get old and demand medical care and stop spending money on consumption, then things will change dramatically,” he said in an interview last month. “That to me means higher inflation.”
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