Long Bond Rallying Five Times TIPS Gives Fed Room for QE4

“As investors sought a refuge from inflation in August amid concern about Federal Reserve efforts to prop up the U.S. economy, David Brownlee was buying the securities most vulnerable to rising consumer prices.

Brownlee, who helps oversee $29 billion at Sentinel Asset Management, bought 30-year Treasuries, proved prescient as the Fed’s third round of monetary stimulus failed to ignite inflation. The government’s longest-maturity bonds gained 6.42 percent, compared with 1.37 percent for Treasury Inflation Protected Securities, since the central bank said Sept. 13 that it would buy $40 billion a month in mortgage bonds.

While TIPS, whose principal rises and falls with the U.S. consumer price index, beat Treasuries that aren’t indexed to inflation in previous episodes of quantitative easing, or QE, this time is different. The bond market expects inflation to remaincontained for the next decade, giving Fed Chairman Ben S. Bernanke and President Barack Obama time to boost the economy five years after the start of the worst financial crisis since the Great Depression.

“Inflation is on the backburner until you see a strong economy,” Brownlee, the head of fixed-income at Sentinel Asset Management, said in a Dec. 7 interview from Montpelier, Vermont. “We take the Fed at its word that rates are going to be relatively low.”

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