“At a time when the bond market expects inflation to stay at about the past decade’s average, the biggest buyers of government debt say they need protection from rising consumer prices as central banks focus on growth.
Pacific Investment Management Co. and Invesco Ltd. say growing central-bank tolerance of inflation means securities with interest or principal tied to consumer prices are the ones to own. Global expectations indicated by the gap between yields on so-called linkers and government bonds reached a 21-month high of 1.70 percent, Bank of America Merrill Lynch indexes show. Economists in Bloomberg surveys forecast consumer-price gains of 2.72 percent in 2013, in line with the 10-year average.
After four years of stimulating economies, central bankers are starting to see signs of accelerating growth, spurring some bond investors to prepare for a rise in yields from record lows. Index-linked securities are favored because sovereign-debt returns are being erased by what little inflation there is.
“There’s an element of central banks, whether they say it or not, being more relaxed about allowing inflation to rise,” Paul Mueller, a London-based fund manager at Invesco Asset Management, a unit of Invesco Ltd. (IVZ), which manages $713 billion, said in a telephone interview Feb. 19. “While I don’t think we are going to see inflation escaping to very high levels, it does make sense to have protection.”
