WSJ "Inflation-Linked Bonds, Once Driven by Inflation Expectations, Face Consecutive Sell-Offs"
[Asia Economy Reporter Jeong Hyunjin] As expectations for the development of a novel coronavirus (COVID-19) vaccine grow, investors in the market are lowering their expectations that inflation will rise, the Wall Street Journal (WSJ) reported on the 18th (local time).
WSJ reported that following the U.S. presidential election, expectations for additional stimulus measures in Congress have gradually faded, raising concerns that the inflationary trend will weaken, and investors have begun to sell 10-year Treasury Inflation-Protected Securities (TIPS) one after another.
The yield on these bonds had fallen to as low as -1.104% until August but rose to -0.768% on the 9th, marking the highest level since early July. Recently, it has been maintaining around the -0.8% range. When bond yields rise, bond prices fall.
Bond investors react sensitively to inflation. When inflation rises, the returns from bonds relatively lose value. TIPS are bonds that adjust the principal based on the inflation rate and pay interest accordingly, preserving the real value of the bond even when inflation occurs.
Due to massive fiscal and monetary policies releasing huge liquidity into the market, investors flocked to TIPS in August expecting inflation to rise. However, actual inflation has not moved significantly. The U.S. Consumer Price Index (CPI) for October showed no change compared to the previous month, marking the lowest level since a 0.1% decline in May.
Zero Jung, Chief Economist at Mirabaud Asset Management, said, "Looking at the big picture, the effect of slowing inflation caused by the pandemic outweighs the inflationary effect," and forecasted, "(In the short term) inflation is expected to decline further."
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