PIMCO calls US inflation higher

PIMCO, one of the world’s leading bond fund managers, has suggested investors begin to think about protecting themselves from a sharp rise in inflation by buying inflation linked bonds. ILBs are bonds where the capital amount is adjusted quarterly for inflation. Mihir Worah, of PIMCO, said in a research note last week that many investors are still thinking about deflation and perhaps haven’t factored in a possible inflation spike. The returns on fixed rate bonds are eaten away when inflation rises and PIMCO forecasts that US inflation will rise to 2.00% in coming years, in line with central bank’s forecasts. It was, if anything, “likely to overshoot that” he said. The most recent ILB tender in Australia (23 June) saw investors buy ILBs at 3.8bps above the inflation rate suggesting they were happy to lock in returns that were only a modest amount above the inflation rate.