U.S. Inflation-Protected Bond Yields Hold Near Record Lows
January 20 2021 - 1:13PM
Dow Jones News
By Sam Goldfarb
Investors are hanging on to bonds that protect against inflation
even as they sell other U.S. government debt, a sign many trust the
Federal Reserve to hold interest rates steady even if the economy
picks up steam.
In recent trading, the yield on the 10-year Treasury
inflation-protected security was minus 1.047%, according to
Tradeweb, compared with minus 1.032% on Tuesday.
The 10-year TIPS yield has climbed slightly from its record
closing low of minus 1.115% set on Jan. 4 but not nearly as much as
the yield on the regular 10-year Treasury note. That yield, a
benchmark rate for borrowing costs throughout the economy, has
jumped to 1.090% in recent trading from 0.915% on Jan. 4. Yields
rise when bond prices fall.
Taken together, these moves suggest investors increasingly
expect higher inflation, but not rate increases from the Fed,
analysts said.
Over the past several months, market-based measures of
investors' inflation expectations have risen, based on the belief
that a combination of coronavirus vaccines, increased government
spending and continued support from the Fed will lead to a strong
economic rebound this year.
Inflation expectations and nominal Treasury yields got an extra
boost two weeks ago when Democrats won two Senate runoff elections
-- giving them narrow control over both chambers of Congress, along
with the White House.
Those results opened up the possibility for even more government
spending than investors previously anticipated. Meanwhile, Fed
officials have indicated that they aren't close to raising interest
rates, having adopted a new policy framework last year that aims to
push inflation above their 2% target for a period so that it
doesn't languish below that level.
Yields on Treasury inflation-protected securities, or TIPS, are
a proxy for what investors call real Treasury yields -- or the
return on regular Treasurys after adjusting for inflation.
Negative real yields tend to push investors into riskier assets
such as stocks and corporate bonds in search of positive returns.
They also suggest that many investors -- even as they increase
their inflation expectations -- aren't overly worried about runaway
inflation, which would force the Fed to raise rates.
"The Fed won't worry too much about higher nominal interest
rates as long as the move higher is led by inflation expectations,
because that would mean that real interest rates remain negative
and Fed policy remains accommodative," said Donald Ellenberger,
senior portfolio manager at Federated Hermes.
Mr. Ellenberger said his multisector bond fund, the Federated
Hermes Total Return Bond Fund, has increased its holdings of TIPS
to 7% of the portfolio from 4.5% last May due the growing risk of
higher inflation caused by what he sees as a new era of larger
federal budget deficits combined with easy-money Fed policies.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
January 20, 2021 13:58 ET (18:58 GMT)
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