Monday, November 23, 2009

BlackRock's Weinstein: Deflation Risks Not Over


NEW YORK -(Dow Jones)- Despite concerns that the massive amounts of stimulus provided to the U.S. economy will fuel inflation down the line, Brian Weinstein at Blackrock Inc. still sees deflation risks in the year ahead.

The consumer price index excluding energy and food, known as core CPI, is still running "very, very close to zero," the co-head of the Global Bond Portfolio Team within BlackRock's Fixed Income Portfolio Management Group said in an interview. "If you have another slide down in the economy, you could have negative CPI in the middle of the second quarter and into the third quarter."

Core CPI rose 0.2% in October from September and was up 1.7% from October 2008. The headline CPI was down 0.2% in October from a year earlier.

Weinstein's views reflect those of Federal Reserve officials, who have repeatedly said that given the slack in the economy, they see little risk that the extraordinary credit easing measures and asset purchase programs will boost prices.

Given the pretty tame inflation outlook near term, Weinstein said he wouldn't own Treasury inflation-protected securities due January and April 2011 because they don't provide much upside in prices. But long-term TIPS provide attractive value, especially in the 20-year sector, said Weinstein.

Weinstein noted that there is a "dichotomy" between inflation expectations, which have been rising this year, and data that show little inflation pressure.

One gauge of inflation expectations is the yield spread between a TIPS and similar-maturity plain-vanilla, or nominal, Treasury security, known as the breakeven rate. Prices of gold, another preferred asset to hedge against inflation, hit an all-time high of $1,171 an ounce Monday.

The 10-year breakeven rate traded little changed at 2.19 percentage points Monday, signaling investors expect an average annualized inflation rate of 2.19% within a decade. The rate dipped below zero late last year when deflation fears hit a peak. But this year, it has risen steadily as the economy has recovered.

Investors have flocked to TIPS this year amid concerns that the support provided by the Federal Reserve and the U.S. government, while helping to revive the economy, are undermining the dollar's value and will lead to inflation in the years ahead.

Rising inflation eats into the fixed returns on nominal bonds, making them less attractive for investors. TIPS provide protection against rising prices as both the principal and interest payments will be adjusted higher along with rise in consumer prices.

"Our clients are much more worried about inflation than before because of what the major central banks have done. They are worried about policy errors that could cause inflation," said Weinstein, who manages $1.7 billion BlackRock Inflation Protected Bond (BPRIX), the company's flagship TIPS fund. "This year, we had inflows from every part of the world. We had massive growth in our business."

Weinstein's fund saw net inflows of $1 billion through the end of September, already surpassing the net inflows of $340 million for the whole of 2008, according to data from BlackRock. The fund has handed investors a return of 17.63% over the 12 months ending Oct. 31, compared with 17.15% on its benchmark index, the Barclays' U.S. TIPS Index.

TIPS have handed investors a return of 12.9% this year through Friday, according to data from Barclays. In contrast, nominal Treasurys have lost 1.85% over the same period.

Weinstein said TIPS will continue to outperform nominal Treasurys in 2010, but the return is unlikely to match this year's strong performance.

He also said that TIPS provide better value compared with similar-type bonds in the euro zone, the U.K. and Japan. -0-

-By Min Zeng, Dow Jones Newswires; 212-416-2229;

(END) Dow Jones Newswires
Copyright (c) 2009 Dow Jones & Company, Inc.

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