Tags: Morningstar | Bond Investors | Inflation | Rates

Morningstar Analyst Strauts: Bond Investors Should Fear Inflation, Not Rising Rates

By    |   Wednesday, 12 March 2014 07:15 AM

Most bond investors worry about rising rates. That fear may be misplaced. They should really be worrying about inflation, says Morningstar Senior Fund Analyst Timothy Strauts.

One dollar invested in five-year Treasurys in 1926 would have grown to $93 today, Strauts points out.

But wait. When adjusted for inflation, that $1 would have grown to just $7.

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Government bonds would have produced returns of more than 100 percent during the 1970s, a period of exceptionally high inflation.

"But when you adjust the returns for inflation, you would have actually lost money," he says. "As you can see, inflation is a very important factor to look at."

Economists expect an inflation rate of only 1.5 to 2 percent for the time being, he adds. "But investors should really keep an eye on this over the long term."

Concerns of rising inflation have prompted bond investors to show more interest in Treasury inflation-protection securities, or TIPS, according to MarketWatch.

Prospects for low inflation sparked little interest in the securities in recent years. The Barclays U.S. TIPS index, for instance, was down 5.9 percent during the last 12 moths. That may be changing.

In the week ending last Wednesday, investors plowed almost $360 million into TIPS bond funds, the most since May 2012, MarketWatch reports, citing data from research firm EPFR Global.

As a result, prices for the securities increased and their yields fell more than other Treasury bonds.

Some investors see incipient signs of inflation, such an increase in commodity prices this year.

"There's a little bit of contrarian buying, if you will, with the idea that growth is meeting expectations," Gemma Wright-Casparius, senior portfolio manager at Vanguard Inflation Protected-Securities Funds, told MarketWatch. "It's like buying fire insurance before there's a fire."

The Federal Reserve may be unable to contain inflation as it winds down its quantitative easing stimulus, writes economist Lewis Mandell for PBS. Plus, if the movement to increase the minimum wage succeeds, rising labor costs could prompt costs of goods to rise, creating an inflationary cycle.

"This should scare the hell out of those of us who are retired and living on (at least partly) fixed incomes," Mandell writes, saying even a relatively small increase inflation will have a huge long-term impact on retirees living on fixed incomes.

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InvestingAnalysis
Most bond investors worry about rising rates. That fear may be misplaced. They should really be worrying about inflation, says Morningstar Senior Fund Analyst Timothy Strauts.
Morningstar,Bond Investors,Inflation,Rates
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2014-15-12
Wednesday, 12 March 2014 07:15 AM
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