We published a bullish view on U.S. Inflation-Linked Bonds today on Seeking Alpha. Below are some excerpts:
- The sell-off in inflation-linked government bonds has provided a great opportunity for investors looking for a risk-free positive nominal and real return with the potential for capital gains.
- We see 30-year TIPS as a way to take advantage of either a rise in inflation expectations should risk appetite return to credit markets, further monetary easing, or both.
- While we believe huge deficits as far as the eye can see could lead to rising yields, such a rise would only be sustainable in the event of rising inflation.
“We see 30-year TIPS as a way to take advantage of either a rise in inflation expectations should risk appetite return to credit markets, further monetary easing, or both. Our core view is for both a policy-induced rise in inflation expectations and decline in bond yields over the long term which should see real yields head back into negative territory. This would mean a ~30% rally in the bond price with much less downside risk and volatility relative to equities.”
“A recovery in risk assets would almost certainly lead to a fall in inflation-linked bond yields as it would coincide with a rally in inflation expectations which would likely be must steeper than any rise in nominal bond yields. In the short-term inflation expectations are largely determined by risk sentiment as the close correlation between high yield bond yields and breakeven inflation expectations shows. Typically, recoveries from collapses in risk sentiment have seen inflation-linked bond yields come down as inflation expectations rise much more sharply than nominal yields.”
“If bond yields continue to rise due to deficit concerns yet inflation expectations remain low, then the Fed will have no problem raising its debt monetization efforts to keep yields in check. Unless the Fed regains some independence and pushes back against monetizing the government’s deficits, we see no scenario where positive real yields on long-term bonds can remain intact.”