In a weak global economy, inflation may be years away. But once it erupts, investors could find they can't get enough inflation-linked bonds. These debt instruments offer security for investors by keeping pace with rising prices in the economy. They carry big risks for the governments that issue such bonds because when inflation rears its head, they cost the issuer and by extension taxpayers, much more than nominal debt securities.
So governments are loath to issue too many Treasury Inflation Protected Securities (TIPS), analysts say. As investors fret about the impact of multi-trillion dollar stimulus spending and liquidity injections, they are looking for ways to defend their savings against lurking inflation.
TIPS is one route, and market players might be wise to get ahead of the game and buy them now, before demand outstrips a relatively small pool of supply, said analyst Don Coxe. "What we are doing is monetary creation on an unprecedented scale and you absolutely have to protect yourself against the possibility of things going wrong as they did back in the 1970s," said Coxe, head of Coxe Advisors LLC in Chicago, which consults clients of the BMO Financial Group.
There is a risk inflation will ignite in a year or two once central banks start to withdraw emergency cash injections. Some see similarities with the 1970s, a decade that began with a recession that led to double-digit inflation. A drop in the dollar and rise in gold this week hint investors are already worried about this scenario.
Comments
Comments are closed.