How does PIMCO’s outlook affect the firm’s view of Treasury Inflation Protected Securities (TIPS)?
Powers: Our forecast rests in part on the fulfillment of Fed Chairman Ben Bernanke’s expectation that core inflation will be moderating in the next six to 18 months. TIPS have underperformed nominal Treasury issues after break-even inflation levels peaked in the May-June period—when the market expected that inflation risks in the short term could be increasing. We have moved past that peak with commodities now discounting the global slowdown and removing some of the fear premium from commodities prices. With inflation risks moderating, including risks from employment, which we also expect to see decline ahead, TIPS could underperform further in the short run. We note, however, that value is returning to the TIPS market for long-term holders now that break-even inflation rates priced into TIPS are approaching the 2.25% level on headline inflation, which we believe is a long-term support level. Q: PIMCO has long favored municipal bonds as a defensive strategy against rising rates in the
