The bond markets currently expect the inflation to stay at the average of the last decade and under such circumstances, the biggest buyer of the Government Debt, Pacific Investment Management Co. stated that they will require protection from the increasing consumer prices, as the Central banks are more focused on growth these days.
The Central Bank tolerance of inflation is currently growing and this has made companies such as Pacific Investment Management (Known as Pimco) and Invesco Ltd asking for protection. According to the Bank of America Merrill Lynch Index, the gap between yields on linkers and Government bonds has reached to 1.70%, a 21-month high. According to economists, this is an indication of global expectations. Economists predict the consumer price to go to 2.72% in 2013, along the lines of the average of last 10 years.
The last 4 years have been more of about stimulating economies and now the Central bankers are hopeful to accelerate the growth. This has spurred hope of some bond investors to prepare for an increase in yield from record low values. Currently, investors prefer index-linked securities more as sovereign debt returns are getting erased because of inflation.
According to the Fund Manager of Invesco Asset Management, Paul Mueller, the central banks may accept or they may not, but, they are kind of relaxed when it comes to allowing the inflation to increase. Paul added that inflation is not expected to go to very high levels; still proper precautions should be taken right now.
As investors are seeking insurance against the future price increases, the inflation protected issues have helped the developed markets to outperform the regular securities by 0.25 percentage points in 2013, till 20th February. Linkers have been able to perform better than the non-indexed bonds of counties such as Italy, UK, Australia, Sweden, Japan, Germany, New Zealand and Australia.
Policy makers of different countries such as UK, US and Japan have pumped more than $3.5 trillion into the respective economies in an attempt to stimulate growth; as investors feel that the darkest economic phase since 2nd World War is finally over. According to economists, the Global Gross Domestic Product should increase by 2.4% in 2013. The same was 2.2% in last year.
In 2013, the US Treasury Inflation Protected Securities have declined by 1.32%, as mentioned in Barclays US Government Comparator Bond Index.