正文
Treasury Market Inflation Anxiety Renewed by Dollar
By Deborah Finestone
Nov. 13 (Bloomberg) -- For the first time in 18 months, the U.S.government bond market is showing growing anxiety that the plummetingdollar will result in runaway inflation.
The combination ofthe currency's 31 percent decline during George W. Bush's presidency,oil prices near a record high and interest rates at a four-year lowhave convinced investors that consumer prices are poised to accelerate.While all Treasuries have gained during the worst U.S. housing marketsince 1991, none have done better than Treasury Inflation ProtectedSecurities.
TIPS have returned 10 percent this year, the mostsince 2002, compared with 7.3 percent for all Treasuries, according toindexes compiled by New York-based Merrill Lynch & Co. Ten-yearTIPS yield 2.43 percentage points less than Treasuries, a gap thatrepresents the rate of price increases investors expect over the lifeof the debt. As recently as September, the difference was 2.19percentage points, the narrowest in almost four years.
''It'salmost the best of all scenarios for TIPS right now,'' said KennethVolpert, a senior portfolio manager at Vanguard Group Inc. in ValleyForge, Pennsylvania, who runs a $10 billion TIPS fund. ''Given thestrength of the global economy, energy prices and the weak dollar, itfeels inflationary.''
The dollar dropped 12 percent so far in2007, based on the Federal Reserve's U.S. Trade Weighted Major CurrencyIndex, and fell against 15 of the 16 most-traded currencies, accordingto data compiled by Bloomberg. The Canadian dollar and Brazil's realboth gained about 20 percent against the dollar. Only Mexico's peso hasdepreciated compared with the U.S. currency.
Oil, Gold, Platinum
Aweakening dollar is feeding inflation by driving up the prices ofimported goods, especially commodities used to hedge against currencylosses.
Oil rose 61 percent this year, touching a record$98.62 a barrel this month. Gold has increased 31 percent to $848 anounce on the Comex division of the New York Mercantile Exchange.Platinum, used for jewelry and catalytic converters, climbed 25 percentand reached $1,498.80 an ounce.
Import prices jumped 9.6percent in October from a year earlier, the most since September 2005,the Labor Department said Nov. 9. The government may say on Nov. 15that consumer prices climbed 3.5 percent in October from a yearearlier, the most since August 2006, based on the median estimate of 23economists surveyed by Bloomberg.
Dollar Effect
Wholesaleprices surged 4.4 percent in the year through September, the fastestsince June 2006. The government may say on Nov. 14 that prices rose 6.4percent in the year through October, according to the median estimateof economists surveyed by Bloomberg.
Inflation typicallyaccelerates 21 months after the dollar starts depreciating, accordingMustafa Chowdhury, head of U.S. interest rate research in New York atDeutsche Bank AG. A ''substantial' increase in consumer prices in 2009is possible because of the dollar's slide, he said. The firm, a unit ofGermany's biggest bank, is one of the 21 primary dealers of U.S.government securities that trade with the Fed.
Growing concernover inflation, which erodes the value of fixed interest payments, maylimit the biggest rally in U.S. government securities since 2002.Returns for Treasuries have already more than doubled last year's 3.1percent and this year's 1.5 percent increase in the Standard &Poor's 500 Index, according to index data compiled by Merrill Lynch.
Mortgage Debacle
''Inflation-adjustedbonds are the premier place to be,'' said Seth Plunkett, a fund managerat American Century Investments in Mountain View, California. The firmoversees $19.6 billion in fixed income, including about $1.7 billion inTIPS.
The Fed's ability to fight price increases has beencompromised this year by falling home sales, rising mortgagedelinquencies and contaminated credit markets that forced the world'sbiggest banks, including New York-based Citigroup Inc. and Zurich-basedUBS AG, to record more than $45 billion in writedowns and losses.
Ratherthan raise its target rate for overnight loans between banks, policymakers cut borrowing costs twice in the past two months, to 4.50percent from 5.25 percent, in order to keep the economy from fallinginto recession. Lower rates gave traders more reasons to sell thedollar, spurring inflation.
'Upside Risks'
The outlookfor prices is ''subject to important upside risks'' from crude oil,commodities and the weaker dollar, Fed Chairman Ben S. Bernanke said intestimony to the Joint Economic Committee of Congress on Nov. 8.''These factors were likely to increase overall inflation in the shortrun and, should inflation expectations become unmoored, had thepotential to boost inflation in the longer run as well.''
Benchmark10-year note yields rose 2 basis points to 4.24 percent today, afterdropping 10 basis points, or 0.10 percentage point last week, asinvestors sought the relative safety of government debt amid mountinglosses in credit markets. The yield on benchmark TIPS due in July 2017declined 13 basis points to 1.80 percent last week, and fell another 3basis points today.
The difference in yields between two- and10-year Treasuries, another measure of inflation expectations, widenedto as much as 81 basis points, the most since March 2005, aslonger-maturity debt underperformed.
''There's significantdemand for TIPS because all the stars are aligned,'' said Jabaz Mathai,who helps manage $385 billion in fixed income in San Francisco atBarclays Global Investors. ''The dollar has weakened over a long periodbut recently the trend has accelerated.''
Lower Rates
The firm recommends five- and 10-year TIPS because they are most sensitive to commodities prices, Mathai said.
Inflation-protectedsecurities pay interest at lower rates than Treasuries on a principalamount that rises in line with the Labor Department's consumer priceindex. The index increased 2.8 percent in the year through September,the most since the 12 months through March.
Even with concernsrising, price gains in the U.S. remain relatively slow. Excluding foodand energy, the measure more closely watched by the Fed, core pricesrose 2.1 percent in the last 12 months.
That's the lowest rateduring a time when the Fed began lowering borrowing costs in more than40 years, according to David Rosenberg, chief North American economistat Merrill Lynch in New York. The firm is also a primary dealer.
''Forall the talk about how the Fed is risking inflation, only in 1960 didthe Fed embark on an easing cycle with the core rate lower than it istoday,'' Rosenberg wrote in a Nov. 2 note. He didn't return calls forcomment.
Returns Destroyed
For bondholders, any pickupcan destroy returns. When CPI rose 4.7 percent in the third quarter of2005, Treasuries lost 1.08 percent. Prices rose to 2.7 percent from 1.6percent in 1999, and government debt lost 2.38 percent.
Thedollar's depreciation is helping keep the U.S. economy growing. Grossdomestic product rose 3.9 percent in the third quarter, the highestsince March 2006, the Commerce Department said on Oct. 31. The tradedeficit unexpectedly narrowed 0.6 percent in September to the smallestsince May 2005 as a weaker dollar fueled exports, the governmentreported Nov. 9.
The last time inflation expectations rosethis fast in response to the currency market was in April 2006, whenfinance ministers from the Group of Seven most-industrialized nationssaid Asian currencies must be allowed to appreciate.
Thedollar dropped 5 percent against its major trading partners in Apriland May 2006. CPI rose to 4.3 percent in June from 3.5 percent in Aprilthat year and the difference in yields between 10-year TIPS andTreasuries, known as the breakeven rate, jumped to a high of 2.74percentage points in May.
Global Anxiety
Inflationexpectations are rising around the world. The gap between 10-year U.K.gilts and inflation-linked notes is 3.31 percentage points, the widestsince June and up from 3.12 points in August. The breakeven rate forFrench debt has risen to 2.24 percentage points from 2.06 points in thesame period.
Anxiety in the bond market has promptedindividual investors to put more money into TIPS. Mutual funds thatspecialize in the securities have attracted a net $1.3 billion throughSeptember to $35.2 billion, according to Financial Research Corp., aBoston-based information company.
By Deborah Finestone
Nov. 13 (Bloomberg) -- For the first time in 18 months, the U.S.government bond market is showing growing anxiety that the plummetingdollar will result in runaway inflation.
The combination ofthe currency's 31 percent decline during George W. Bush's presidency,oil prices near a record high and interest rates at a four-year lowhave convinced investors that consumer prices are poised to accelerate.While all Treasuries have gained during the worst U.S. housing marketsince 1991, none have done better than Treasury Inflation ProtectedSecurities.
TIPS have returned 10 percent this year, the mostsince 2002, compared with 7.3 percent for all Treasuries, according toindexes compiled by New York-based Merrill Lynch & Co. Ten-yearTIPS yield 2.43 percentage points less than Treasuries, a gap thatrepresents the rate of price increases investors expect over the lifeof the debt. As recently as September, the difference was 2.19percentage points, the narrowest in almost four years.
''It'salmost the best of all scenarios for TIPS right now,'' said KennethVolpert, a senior portfolio manager at Vanguard Group Inc. in ValleyForge, Pennsylvania, who runs a $10 billion TIPS fund. ''Given thestrength of the global economy, energy prices and the weak dollar, itfeels inflationary.''
The dollar dropped 12 percent so far in2007, based on the Federal Reserve's U.S. Trade Weighted Major CurrencyIndex, and fell against 15 of the 16 most-traded currencies, accordingto data compiled by Bloomberg. The Canadian dollar and Brazil's realboth gained about 20 percent against the dollar. Only Mexico's peso hasdepreciated compared with the U.S. currency.
Oil, Gold, Platinum
Aweakening dollar is feeding inflation by driving up the prices ofimported goods, especially commodities used to hedge against currencylosses.
Oil rose 61 percent this year, touching a record$98.62 a barrel this month. Gold has increased 31 percent to $848 anounce on the Comex division of the New York Mercantile Exchange.Platinum, used for jewelry and catalytic converters, climbed 25 percentand reached $1,498.80 an ounce.
Import prices jumped 9.6percent in October from a year earlier, the most since September 2005,the Labor Department said Nov. 9. The government may say on Nov. 15that consumer prices climbed 3.5 percent in October from a yearearlier, the most since August 2006, based on the median estimate of 23economists surveyed by Bloomberg.
Dollar Effect
Wholesaleprices surged 4.4 percent in the year through September, the fastestsince June 2006. The government may say on Nov. 14 that prices rose 6.4percent in the year through October, according to the median estimateof economists surveyed by Bloomberg.
Inflation typicallyaccelerates 21 months after the dollar starts depreciating, accordingMustafa Chowdhury, head of U.S. interest rate research in New York atDeutsche Bank AG. A ''substantial' increase in consumer prices in 2009is possible because of the dollar's slide, he said. The firm, a unit ofGermany's biggest bank, is one of the 21 primary dealers of U.S.government securities that trade with the Fed.
Growing concernover inflation, which erodes the value of fixed interest payments, maylimit the biggest rally in U.S. government securities since 2002.Returns for Treasuries have already more than doubled last year's 3.1percent and this year's 1.5 percent increase in the Standard &Poor's 500 Index, according to index data compiled by Merrill Lynch.
Mortgage Debacle
''Inflation-adjustedbonds are the premier place to be,'' said Seth Plunkett, a fund managerat American Century Investments in Mountain View, California. The firmoversees $19.6 billion in fixed income, including about $1.7 billion inTIPS.
The Fed's ability to fight price increases has beencompromised this year by falling home sales, rising mortgagedelinquencies and contaminated credit markets that forced the world'sbiggest banks, including New York-based Citigroup Inc. and Zurich-basedUBS AG, to record more than $45 billion in writedowns and losses.
Ratherthan raise its target rate for overnight loans between banks, policymakers cut borrowing costs twice in the past two months, to 4.50percent from 5.25 percent, in order to keep the economy from fallinginto recession. Lower rates gave traders more reasons to sell thedollar, spurring inflation.
'Upside Risks'
The outlookfor prices is ''subject to important upside risks'' from crude oil,commodities and the weaker dollar, Fed Chairman Ben S. Bernanke said intestimony to the Joint Economic Committee of Congress on Nov. 8.''These factors were likely to increase overall inflation in the shortrun and, should inflation expectations become unmoored, had thepotential to boost inflation in the longer run as well.''
Benchmark10-year note yields rose 2 basis points to 4.24 percent today, afterdropping 10 basis points, or 0.10 percentage point last week, asinvestors sought the relative safety of government debt amid mountinglosses in credit markets. The yield on benchmark TIPS due in July 2017declined 13 basis points to 1.80 percent last week, and fell another 3basis points today.
The difference in yields between two- and10-year Treasuries, another measure of inflation expectations, widenedto as much as 81 basis points, the most since March 2005, aslonger-maturity debt underperformed.
''There's significantdemand for TIPS because all the stars are aligned,'' said Jabaz Mathai,who helps manage $385 billion in fixed income in San Francisco atBarclays Global Investors. ''The dollar has weakened over a long periodbut recently the trend has accelerated.''
Lower Rates
The firm recommends five- and 10-year TIPS because they are most sensitive to commodities prices, Mathai said.
Inflation-protectedsecurities pay interest at lower rates than Treasuries on a principalamount that rises in line with the Labor Department's consumer priceindex. The index increased 2.8 percent in the year through September,the most since the 12 months through March.
Even with concernsrising, price gains in the U.S. remain relatively slow. Excluding foodand energy, the measure more closely watched by the Fed, core pricesrose 2.1 percent in the last 12 months.
That's the lowest rateduring a time when the Fed began lowering borrowing costs in more than40 years, according to David Rosenberg, chief North American economistat Merrill Lynch in New York. The firm is also a primary dealer.
''Forall the talk about how the Fed is risking inflation, only in 1960 didthe Fed embark on an easing cycle with the core rate lower than it istoday,'' Rosenberg wrote in a Nov. 2 note. He didn't return calls forcomment.
Returns Destroyed
For bondholders, any pickupcan destroy returns. When CPI rose 4.7 percent in the third quarter of2005, Treasuries lost 1.08 percent. Prices rose to 2.7 percent from 1.6percent in 1999, and government debt lost 2.38 percent.
Thedollar's depreciation is helping keep the U.S. economy growing. Grossdomestic product rose 3.9 percent in the third quarter, the highestsince March 2006, the Commerce Department said on Oct. 31. The tradedeficit unexpectedly narrowed 0.6 percent in September to the smallestsince May 2005 as a weaker dollar fueled exports, the governmentreported Nov. 9.
The last time inflation expectations rosethis fast in response to the currency market was in April 2006, whenfinance ministers from the Group of Seven most-industrialized nationssaid Asian currencies must be allowed to appreciate.
Thedollar dropped 5 percent against its major trading partners in Apriland May 2006. CPI rose to 4.3 percent in June from 3.5 percent in Aprilthat year and the difference in yields between 10-year TIPS andTreasuries, known as the breakeven rate, jumped to a high of 2.74percentage points in May.
Global Anxiety
Inflationexpectations are rising around the world. The gap between 10-year U.K.gilts and inflation-linked notes is 3.31 percentage points, the widestsince June and up from 3.12 points in August. The breakeven rate forFrench debt has risen to 2.24 percentage points from 2.06 points in thesame period.
Anxiety in the bond market has promptedindividual investors to put more money into TIPS. Mutual funds thatspecialize in the securities have attracted a net $1.3 billion throughSeptember to $35.2 billion, according to Financial Research Corp., aBoston-based information company.
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