For almost a year Wan-Chong Kung avoided U.S. government debt insured against inflation as consumer prices stagnated. Now, the bond-fund manager at Nuveen Asset Management whose inflation-indexed fund has beaten 95 percent of its peers the last three years, is loading up on Treasury Inflation-Protected Securities.
Her change comes as Federal Reserve Vice Chairman Janet Yellen, who voted for every stimulus measure since 2008, became the favorite to succeed Ben S. Bernanke as the next Fed chief and the central bank maintained its $85 billion a month in bond buying. Policy makers also said their target interest rate for overnight loans between banks may rise at a slower pace than suggested by historical measures.
That last “big dovish surprise” shows the Fed is “continuing to err on the side of promoting sustained job growth potentially at the risk of higher inflation,” Kung, who helps manage $125 billion at Nuveen, said in a Sept. 24 telephone interview from Minneapolis.
Kung has plenty of company. TIPS, as the inflation-indexed bonds are known, have gained 3.5 percent since Sept. 5, the best three-week rally since August 2011, after losing 8.7 percent in the first eight months, the most ever in that period, according to Bank of America Merrill Lynch's U.S. Inflation-Linked Treasury Index.
Eoin Treacy's view Bull markets that persist for a number of
years have a conditioning effect on investors. We learn what is required of
us to make money. For as long as a bull market remains in motion forbearance
will be rewarded. Holding on through declines will eventually result in higher
prices and using reactions to increase long positions will be one of the most
profitable strategies. Of course that all changes when the animating factor
that drove demand dominance is removed.
10-year TIPS yields trended lower from a credit crisis peak of over 3% to a late 2012 low of -1%., becoming one of the best performing fixed income instruments in the process. The rebound from May saw yields encounter resistance near 1% and they continue to unwind the overbought condition relative to the 200-day MA. The delay of the Fed's tapering represents a bullish consideration from the perspective of TIPS investors and it would be tempting to perceive the current bounce in prices as a favourable entry point. However the price action tells us something else.
On a price basis, the consistency of the TIPS 2% 2026's uptrend has broken. There is currently some scope for steadying but this is likely to be short-term in nature and a sustained move back above 130 would be required to question top formation completion.
The 10-year Treasury future is also unwinding an oversold condition relative to the 200-day MA, but a sustained move above 130 would be required to begin to question medium-term supply dominance.