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http://www.bloomberg.com/apps/news?pid=20601087&sid=atdwsPTYgl4s&refer=home
Nov. 13 (Bloomberg) -- For the first time in 18 months, the U.S.
government bond market is showing growing anxiety that the plummeting
dollar will result in runaway inflation.
The combination of the currency's 31 percent decline during George W.
Bush's presidency, oil prices near a record high and interest rates at
a four-year low have convinced investors that consumer prices are
poised to accelerate. While all Treasuries have gained during the
worst U.S. housing market since 1991, none have done better than
Treasury Inflation Protected Securities.
TIPS have returned 10 percent this year, the most since 2002, compared
with 7.3 percent for all Treasuries, according to indexes compiled by
New York-based Merrill Lynch & Co. Ten-year TIPS yield 2.43 percentage
points less than Treasuries, a gap that represents the rate of price
increases investors expect over the life of the debt. As recently as
September, the difference was 2.19 percentage points, the narrowest in
almost four years.
``It's almost the best of all scenarios for TIPS right now,'' said
Kenneth Volpert, a senior portfolio manager at Vanguard Group Inc. in
Valley Forge, Pennsylvania, who runs a $10 billion TIPS fund. ``Given
the strength of the global economy, energy prices and the weak dollar,
it feels inflationary.''
The dollar dropped 12 percent so far in 2007, based on the Federal
Reserve's U.S. Trade Weighted Major Currency Index, and fell against
15 of the 16 most-traded currencies, according to data compiled by
Bloomberg. The Canadian dollar and Brazil's real both gained about 20
percent against the dollar. Only Mexico's peso has depreciated
compared with the U.S. currency.
Oil, Gold, Platinum
A weakening dollar is feeding inflation by driving up the prices of
imported goods, especially commodities used to hedge against currency
losses.
Oil rose 61 percent this year, touching a record $98.62 a barrel this
month. Gold has increased 31 percent to $848 an ounce on the Comex
division of the New York Mercantile Exchange. Platinum, used for
jewelry and catalytic converters, climbed 25 percent and reached
$1,498.80 an ounce.
Import prices jumped 9.6 percent in October from a year earlier, the
most since September 2005, the Labor Department said Nov. 9. The
government may say on Nov. 15 that consumer prices climbed 3.5 percent
in October from a year earlier, the most since August 2006, based on
the median estimate of 23 economists surveyed by Bloomberg.
Dollar Effect
Wholesale prices surged 4.4 percent in the year through September, the
fastest since June 2006. The government may say on Nov. 14 that prices
rose 6.4 percent in the year through October, according to the median
estimate of economists surveyed by Bloomberg.
Inflation typically accelerates 21 months after the dollar starts
depreciating, according Mustafa Chowdhury, head of U.S. interest rate
research in New York at Deutsche Bank AG. A ``substantial' increase in
consumer prices in 2009 is possible because of the dollar's slide, he
said. The firm, a unit of Germany's biggest bank, is one of the 21
primary dealers of U.S. government securities that trade with the Fed.
Growing concern over inflation, which erodes the value of fixed
interest payments, may limit the biggest rally in U.S. government
securities since 2002. Returns for Treasuries have already more than
doubled last year's 3.1 percent and this year's 1.5 percent increase
in the Standard & Poor's 500 Index, according to index data compiled
by Merrill Lynch.
Mortgage Debacle
``Inflation-adjusted bonds are the premier place to be,'' said Seth
Plunkett, a fund manager at American Century Investments in Mountain
View, California. The firm oversees $19.6 billion in fixed income,
including about $1.7 billion in TIPS.
The Fed's ability to fight price increases has been compromised this
year by falling home sales, rising mortgage delinquencies and
contaminated credit markets that forced the world's biggest banks,
including New York-based Citigroup Inc. and Zurich-based UBS AG, to
record more than $45 billion in writedowns and losses.
Rather than raise its target rate for overnight loans between banks,
policy makers cut borrowing costs twice in the past two months, to
4.50 percent from 5.25 percent, in order to keep the economy from
falling into recession. Lower rates gave traders more reasons to sell
the dollar, spurring inflation.
Nov. 13 (Bloomberg) -- For the first time in 18 months, the U.S.
government bond market is showing growing anxiety that the plummeting
dollar will result in runaway inflation.
The combination of the currency's 31 percent decline during George W.
Bush's presidency, oil prices near a record high and interest rates at
a four-year low have convinced investors that consumer prices are
poised to accelerate. While all Treasuries have gained during the
worst U.S. housing market since 1991, none have done better than
Treasury Inflation Protected Securities.
TIPS have returned 10 percent this year, the most since 2002, compared
with 7.3 percent for all Treasuries, according to indexes compiled by
New York-based Merrill Lynch & Co. Ten-year TIPS yield 2.43 percentage
points less than Treasuries, a gap that represents the rate of price
increases investors expect over the life of the debt. As recently as
September, the difference was 2.19 percentage points, the narrowest in
almost four years.
``It's almost the best of all scenarios for TIPS right now,'' said
Kenneth Volpert, a senior portfolio manager at Vanguard Group Inc. in
Valley Forge, Pennsylvania, who runs a $10 billion TIPS fund. ``Given
the strength of the global economy, energy prices and the weak dollar,
it feels inflationary.''
The dollar dropped 12 percent so far in 2007, based on the Federal
Reserve's U.S. Trade Weighted Major Currency Index, and fell against
15 of the 16 most-traded currencies, according to data compiled by
Bloomberg. The Canadian dollar and Brazil's real both gained about 20
percent against the dollar. Only Mexico's peso has depreciated
compared with the U.S. currency.
Oil, Gold, Platinum
A weakening dollar is feeding inflation by driving up the prices of
imported goods, especially commodities used to hedge against currency
losses.
Oil rose 61 percent this year, touching a record $98.62 a barrel this
month. Gold has increased 31 percent to $848 an ounce on the Comex
division of the New York Mercantile Exchange. Platinum, used for
jewelry and catalytic converters, climbed 25 percent and reached
$1,498.80 an ounce.
Import prices jumped 9.6 percent in October from a year earlier, the
most since September 2005, the Labor Department said Nov. 9. The
government may say on Nov. 15 that consumer prices climbed 3.5 percent
in October from a year earlier, the most since August 2006, based on
the median estimate of 23 economists surveyed by Bloomberg.
Dollar Effect
Wholesale prices surged 4.4 percent in the year through September, the
fastest since June 2006. The government may say on Nov. 14 that prices
rose 6.4 percent in the year through October, according to the median
estimate of economists surveyed by Bloomberg.
Inflation typically accelerates 21 months after the dollar starts
depreciating, according Mustafa Chowdhury, head of U.S. interest rate
research in New York at Deutsche Bank AG. A ``substantial' increase in
consumer prices in 2009 is possible because of the dollar's slide, he
said. The firm, a unit of Germany's biggest bank, is one of the 21
primary dealers of U.S. government securities that trade with the Fed.
Growing concern over inflation, which erodes the value of fixed
interest payments, may limit the biggest rally in U.S. government
securities since 2002. Returns for Treasuries have already more than
doubled last year's 3.1 percent and this year's 1.5 percent increase
in the Standard & Poor's 500 Index, according to index data compiled
by Merrill Lynch.
Mortgage Debacle
``Inflation-adjusted bonds are the premier place to be,'' said Seth
Plunkett, a fund manager at American Century Investments in Mountain
View, California. The firm oversees $19.6 billion in fixed income,
including about $1.7 billion in TIPS.
The Fed's ability to fight price increases has been compromised this
year by falling home sales, rising mortgage delinquencies and
contaminated credit markets that forced the world's biggest banks,
including New York-based Citigroup Inc. and Zurich-based UBS AG, to
record more than $45 billion in writedowns and losses.
Rather than raise its target rate for overnight loans between banks,
policy makers cut borrowing costs twice in the past two months, to
4.50 percent from 5.25 percent, in order to keep the economy from
falling into recession. Lower rates gave traders more reasons to sell
the dollar, spurring inflation.
