U.S. inflation bonds back in vogue

Mon Sep 1, 2014 8:20am EDT
 
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By Richard Leong

NEW YORK (Reuters) - U.S. investors are back in the hunt for inflation protection for the first time in two years as rising housing costs - particularly for rent - suggest inflation may finally be waking from its post-recession slumber.

That's helping to drive cash into specialty funds that focus on Treasury Inflation Protected Securities, or TIPS, arguably the weakest corner of the U.S. government bond market over the previous year or so, and helping TIPS significantly outperform regular Treasuries this year.

TIPS-focused funds are on pace to end seven consecutive quarters of outflows over which investors drained almost $38 billion from the sector. They've attracted $1.52 billion so far in the third period, marking the first quarterly inflows since the third quarter of 2012 and the largest since the first quarter of 2012.

Fund managers said the rising cost of housing - which accounts for as much as a third or more of various measures of inflation and is outpacing other consumer cost increases - has revived price pressure in the economy.

"TIPS have had a good tail wind this year. We have inflation as opposed to last year when we had disinflation," said Gemma Wright-Casparius, who oversees Vanguard's $26.3 billion inflation-protected securities fund, the biggest U.S. fund of its kind. The fund is up 6.5 percent this year.

Wright-Casparius also helps manage a short-dated TIPS fund whose assets have reached almost $10 billion since it launched nearly two years ago.

BETTING ON INFLATION   Continued...

 
A home for sale sign hangs in front of a house in Oakton, on the day the National Association of Realtors issues its Pending Home Sales for February report, in Virginia March 27, 2014.  REUTERS/Larry Downing