Salient to Investors:
Morningstar says 10 percent of the TIPS market is owned by Pimco.
Jeffrey Gundlach at DoubleLine says TIPS are a disaster and a trap because unless inflation rises, all you have is interest rate risk, just like every other Treasury – it is an asset class that is exposed to investor surprise and disappointment.
Daniel Shackelford at T. Rowe Price said the narrowing in Treasuries/TIPS spread, or the break-even rate, shows investors viewed inflation as less of a threat in the short-term. Shackelford said inflation expectations haven’t budged after 3 or 4 years of hyper-easing and the expectation is for the Fed to become less accommodative – the worst news that the TIPS market could receive.
Jeremie Banet at Pimco said the contraction of the break-even rate shows that the market does not see the economic improvement the Fed is citing as a basis for tapering. Banet said interest rates are rising because people expect the Fed to be less accommodative, not because the economy is improving.
The change to the Fed’s asset purchases that Bernanke signaled by itself was too small to drive the decline in financial markets that followed, said Wynn at Western Asset. His closed-end fund has declined 7.5 percent this year through July 2, trailing 81 percent of peers.
Paul Wynn at Western Asset/Claymore Inflation-Linked Opportunities & Income Fund said much of the recent TIPS selling came from risk-parity funds that follow an asset-allocation strategy pioneered by Ray Dalio at Bridgewater Associates.
Tim McCusker at NEPC said risk-parity strategies are designed to provide higher returns in a variety of economic environments, but fare poorly on tightening or expected tightening of monetary policy.
Michael Mendelson at AQR said risk-parity investors are important TIPS investors, but not that important.
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