Bond market expectations of future inflation have risen to their highest level in seven months, boosting demand for 10-year inflation-linked US Treasury bonds, or Tips, the FT reports.
Strong demand is expected at an auction on Thursday for $6bn in Tips, particularly as investors originally expected a sale of about $8bn.
David Ader, bond strategist at RBS Greenwich Capital, said, “we are nervous about inflation”. The smaller than expected size of the auction and the seasonal tendency for inflation to rise in March supported robust demand for Tips, he noted.
Tips protect investors against inflation by adding principal as consumer prices rise. As inflation expectations increase, investors become more willing to pay higher prices for such bonds and accept lower yields.
The difference between the yields on standard 10-year Treasury bonds and 10-year Tips, known as the break-even rate, is a proxy for market expectations of average annual consumer price inflation. The greater the difference, the higher the inflation expectation.
This indicator has been rising to nearly 2.5 per cent in recent weeks, up from less than 2.3 per cent at the start of this year.
