Bloomberg News

Fidelity, Vanguard, Pimco Say Inflation to Be Contained

February 15, 2012

(Updates with Pimco’s Treasury holdings in 12th paragraph, latest yield in 13th.)

Feb. 14 (Bloomberg) -- Fidelity Investments, Vanguard Group Inc. and Pacific Investment Management Co., which together oversee $4.53 trillion, say U.S. inflation will be contained this year.

Slowing global economic growth will curb price gains, according to Joanna Bewick, a portfolio manager for the Fidelity Strategic Income, Strategic Dividend and Income, and Strategic Real Return funds. Unemployment has prevented wages from rising, Bewick wrote in a report yesterday on the Boston-based company’s website.

“Inflation is likely to remain in check,” according to Bewick. “As long as we’re in this period of getting our economic house in order, I think it’s going to be hard to make the case for an overheating economy.”

Treasury traders increased bets that borrowing rates will stay low in the years ahead after Federal Reserve Chairman Ben S. Bernanke said signs of improving growth mask threats to the U.S. economy. The cost to exchange fixed- for floating-rate payments in a decade has averaged 3.39 percent this year. The so-called forward 10-year swap rate has fallen from last year’s peak of 5.47 percent in February.

Global economic growth will slow to 2.17 percent this year from 2.71 percent in 2011, according to Bloomberg surveys of economists. The U.S. jobless rate fell to 8.3 percent in January, the least since February 2009.

Wages Still ‘Depressed’

“It’s tough for the employee to ask for a raise when there are so many people who would love to have that job at the going rate,” according Bewick, who helps oversee $1.52 trillion for Fidelity. “Wages are still pretty depressed, and I don’t think we’re in danger of any sort of wage-price spiral.”

The difference between yields on U.S. 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.25 percentage points yesterday. It was the most in almost six months. The 10-year average is 2.14 percentage points.

The U.S. consumer price index, or CPI, rose 3 percent in December from the year before, according to a Labor Department report Jan. 19. The odds of the figure averaging 5 percent or more over the next decade are about 10 percent, according to Vanguard, the world’s biggest mutual fund company overseeing $1.65 trillion.

‘Well Contained’

“I’m not currently losing sleep over the prospect for runaway U.S. inflation,” Joe Davis, the chief economist for Valley Forge, Pennsylvania-based Vanguard, wrote on the company’s website Feb. 6. “It’s reasonable to expect U.S. CPI inflation to remain well contained for the next several years.”

Pimco, which oversees $1.36 trillion and is home to the world’s biggest bond fund, says inflation may slow in 2012, according to a report by Mihir P. Worah and Nicholas J. Johnson, portfolio managers for the company.

“Our base case is for inflation to moderate and trend lower,” according to Pimco, which is based in Newport Beach, California. Costs in the economy may pick up after a year, according to Worah and Johnson’s February economic report on the company’s website.

Bill Gross increased U.S. government and related debt to 38 percent of assets in Pimco’s $250 billion Total Return Fund in January, from 30 percent in December, according to a report on the company’s website.

U.S. 10-year yields were little changed today at 1.97 percent as of 6:14 a.m. in London, according to Bloomberg Bond Trader prices. The record low yield was 1.67 percent set on Sept. 23.

Missing the Target

Federal Reserve policy makers set a target of 2 percent for inflation on Jan. 25 and forecast costs in the economy will probably fall short of the goal this year.

The price gauge that the central bank uses is the personal consumption expenditures index, which climbed 2.4 percent for the 12 months ending Dec. 31. The measure increased 1.8 percent after taking out food and energy costs.

U.S. Treasury securities have handed investors an 11 percent gain in the past year as of yesterday, according to Bank of America Merrill Lynch indexes. Investors snapped up government securities as inflation, which erodes a bond’s fixed payments, held in check.

Thirty-year bonds, which are among the most sensitive to prices in the economy because of their long maturity, surged 37 percent, the figures show.

Investors seeking protection against higher costs in the economy in the years ahead sent TIPS to an 18 percent gain, based on the Bank of America data.

The MSCI All Country World Index of stocks handed investors a 1.8 percent loss in the period after accounting for reinvested dividends, according to data compiled by Bloomberg.

--With assistance from Liz Capo McCormick in New York. Editors: Jonathan Annells, Benjamin Purvis

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.


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