Tags: inflation | bonds | tips

Inflation Fear Ignites Scramble for TIPS

Thursday, 15 Oct 2009 03:34 PM

By Dan Weil

What’s worse: Inflation, or just the fear of it?

Despite a still deflating economy, investors have decided on fear of inflation over the real thing, it seems.

Treasury Inflation Protected Securities have surged 7.9 percent this year, while Treasuries have lost 2.8 percent, according to Merrill Lynch indices.

That’s the biggest spread in favor of TIPS since the government first issued them in 1997, Bloomberg reports.

TIPS, of course, are designed to protect investors from inflation. But in this case investors are gobbling up the securities, even though 12-month inflation totals have registered their longest series of contractions since 1955.

While inflation isn’t here yet, many are worried it will come back big-time, thanks to a budget deficit estimated at almost $2 trillion and a government debt burden estimated at 56 percent of GDP.

“Investors are really taking the long view and trying to hedge inflation risk,” Mihir Worah, who oversees the Pimco Real Return Fund, tells Bloomberg.

“That’s the biggest reason why we’re seeing the flows.”

On average, TIPS returned 1.1 percentage points more than Treasuries each year since 1999, according to Bloomberg. In each of the five years when the spread was 2 percentage points or more, inflation rose the following year by an average of 0.8 percentage point.

One major investor worried about inflation is Jim Rogers.

"There's no question the U.S. is vulnerable to hyperinflation down the road or certainly the inflation we saw in the 1970s. I would expect that to come back in the. . . next few years," the commodities guru told CNBC.

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