Bloomberg News

Longer-Maturity TIPS Most Attractive, BlackRock’s Hegarty Says

July 03, 2011

July 1 (Bloomberg) -- Longer-maturity Treasury Inflation Protected Securities are more attractive than regular U.S. government securities because any drop in inflation will prove temporary, according to BlackRock Inc.’s Martin Hegarty.

There’s been a “substantial shift in the inflation dynamics” since the beginning of the Federal Reserve’s program of U.S. Treasury purchases, Hegarty, co-head of global inflation-linked portfolios at BlackRock in New York, said during an interview on Bloomberg Television’s “In The Loop” with Betty Liu.

The consumer-price index increased 0.2 percent in May, compared with the 0.1 percent median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed on June 15. The core measure, which excludes more volatile food and energy costs, climbed 0.3 percent.

BlackRock anticipates that so-called headline inflation will trend lower over the next few month as the effect of higher gasoline prices and higher production costs related to Japan’s record earthquake in March will abate, he said. That will provide consumers with more cash to spend while the economy recovers in the second half and raise the risk of inflation, Hegarty said.

“In a long-term average scenario, 30-year inflation expectations average between 2 1/2 and 3 percent, Hegarty said. “Obviously around 2008 we had some drastic moves, so now at 2.60, I think real rates at 1.75 are relatively fair.”

Thirty-year TIPS yield 1.78 percent. The difference between that and yields on nominal Treasuries, known as the break-even rate, increased one basis point to 2.62 percent, according to Bloomberg Bond Trader prices.

--With assistance from Jon Erlichman and Dominic Chu in New York. Editors: Dave Liedtka, Dennis Fitzgerald

To contact the reporter on this story: Joe Ragazzo at jragazzo@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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