What is PIMCOs view on Treasury inflation-protected securities (TIPS)?
Powers: There were two sides to our debate on TIPS at the September Forum. On the one hand, we are currently in the midst of a disinflationary trend as the U.S. economy slows, with the Fed’s preferred inflation measure – the core personal consumption expenditures deflator – expected to decline from 1.8% to 1.5% over the next 12 months. In a disinflationary environment, we would expect TIPS to underperform Treasuries as real rates decline, perhaps toward 1%. On the other hand, the Fed has had to subordinate its inflation concerns in order to address the potential contagion effects from the meltdown in housing and turmoil in the credit markets. As the Fed lowers the Fed funds rate into stimulative territory and pauses until the housing market and the economy right themselves, PIMCO’s secular forecast for higher inflation will become the market’s primary concern. In that environment, or over the longer term, we see the potential for TIPS to offer relative value versus Treasuries. Q: Munic
