Salient to Investors:

Bank of America Merrill Lynch indexes show the gap in yields between linkers and governments reached a 21-month high of 1.70 percent. Economists forecast consumer-price gains of 2.72 percent in 2013, in line with the 10-year average.

Index-linked securities are favored because sovereign-debt returns are being erased by what little inflation there is.

Paul Mueller at Invesco Asset Mgmt said central banks are more relaxed about allowing inflation to rise, though inflation won’t reach very high levels.

Economists predict global GDP will grow 2.4 percent in 2013 versus 2.2 percent in 2012.

Martin Hegarty at BlackRock recommends inflation-linked bonds over nominal bonds especially the further out you go – prefers inflation-linked debt with 3 to 7 yr maturities in Germany, Italy and the U.K. BlackRock doesn’t expect any immediate jump in consumer prices unless there is a surge in energy costs.

Bank of America Merrill Lynch indexes show the global break-even rate, a measure of inflation expectations, is at 1.64 percent versus the 10-yr average of 1.2 percent and a peak of 2.14 percent in July 2008. The US break-even rate was as high as 2.61 percent this month, up from 2.24 percentage points on September 4.

Craig Veysey at Sanlam Private Investments said it’s a good time to seek inflation protection because central banks understand they need to do much more – the market has not sufficiently priced in the risk.

Aaron Kohli at BNP Paribas said growth and inflation will remain subdued as economies are failing to shrink debt and grapple with above-average unemployment.

Anton Heese at Morgan Stanley says many investors lack conviction on the recovery, and the output gap remains substantial – growth can pick up with inflation remaining subdued.

Bill Gross at Pimco recommends TIPS because the Fed will eventually fuel inflation and because central banks are writing trillions of dollars worth of checks that will ultimately produce the inflation they are targeting. Gross predicts US inflation at 2 percent in 2013 and 2.5 percent for the 3 years after that, and owns 10-yr and 15-yr TIPS that reflect inflation expectations for 2020 and 2025, and New Zealand and Mexican linkers.

Neil Williams at Hermes Fund Managers said central banks have made it even clearer they won’t tolerate anything less than inflation, so will throw the kitchen sink in terms of liquidity injections.

Michael Pond at Barclays said the Fed is more tolerant of higher inflation in order to cut unemployment, so linkers offer very cheap insurance because if the Fed errs, it will err on the side of leaving accommodation longer rather than risking removing it too early.

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