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Another year, another double-digit percentage annual gain for U.S. Treasury inflation-protected securities.
That’s a rare feat for a stodgy asset class often considered the province of pensioners fearful of the ravages of higher prices for food, clothes, rent and gas.
See: Inflation ‘tourists’ are making an aggressive bet on the reflation trade
Though inflation has struggled to make a return to the U.S. economy, especially after this year’s recession in the wake of the coronarvirus pandemic, expectations for economic growth to normalize next year has bolstered the popularity of inflation-linked assets, especially as the Federal Reserve suggests its more willing to keep interest rates low even if inflation briefly overshoots the central bank’s target.
“Fervent demand for inflation protection may look seriously overbought, but relative to U.S. Treasuries may still have room to run,” said Ben Breitholtz, a data analyst at Arbor Data Science, in a Monday note.
A 10-year Treasury inflation-protected security, or TIPs, TIP, -0.08% has earned 12.8% in 2020, its biggest yearly gain since 2011 when inflation insurance would have booked a gain of 16.9%, according to data compiled by Arbor Data Science.
The strong performance in 2020 follows a similarly impressive 2019 when a 10-year TIP booked a positive return of 10.6%, as shown in the chart below.
This year’s performance has been partly driven by the Federal Reserve’s bond-buying programs that have helped lower the 10-year inflation-adjusted yield, or the real yield, below the key negative 1% level in July for the first time.
The drop in inflation-adjusted yields has, in turn, bolstered asset prices across U.S. financial markets.
Meanwhile, the 10-year breakeven rate, or what a holder of Treasury inflation-protected security anticipates inflation to average over the next decade, is at 1.98%, around its highest levels since 2018.
Yet even as inflation expectations gradually climb, few say price levels are unlikely to see a disorderly rise that would force the U.S. central bank into action.
Analysts at BCA Research last week said inflation breakevens between 2.25% and 2.50% are still consistent with periods when inflation was considered “well-anchored.”
Only then, the Fed would start to ease off its ultra-accommodative policy stance, they said.
