As many investors rush out of one corner of the Treasury bond
market, Bill Gross is getting in.
"Buying TIPS," Mr. Gross tweeted on Friday. TIPS--or Treasury
Inflation-Protected Securities--are designed to protect investors
from inflation, which erodes the value of the fixed payment streams
associated with most bonds.
In his Twitter message, Mr. Gross, who runs the $289.1 billion
Total Return Fund at Pacific Investment Management Co., said,
"Foreign dollar reserve countries need protection" from
inflation.
Mr. Gross, founder and co-chief investment officer at Pimco,
didn't immediately reply to questions. Pimco, the world's largest
bond manager, is a unit of Germany's Allianz SE.
TIPS have tumbled this week, and a government auction of new
securities was weak, as investors' worries about inflation ebbed
amid soft global economic data.
While the price decline has made TIPS relatively cheap, Mr.
Gross and others who stepped in may get hurt if selling pressure
renews in coming weeks, analysts warned.
The key question for investors is whether this month's selling
in commodities and TIPS is short-term profit-taking or it signals
that investors have shifted from worrying about the prospect of
inflation, to worrying about the likelihood of deflation, or
persistently falling prices.
If worries over deflation resurface, TIPS could sell off more,
traders said.
The last time deflation worries surfaced was in the fourth
quarter of 2008 following the collapse of Lehman Brothers Holdings
Inc. TIPS holders showed losses of 3.5% for that quarter.
Richard Gilhooly, senior rates strategist at TD Securities,
noted that the selloff in April reminds him of the episode back in
2008 and points to "sign of a very wounded market, leaking
blood."
The TIPS market "may limp along for a few weeks, but the sharks
are circling and will definitely attack again and do more damage
next time," he says.
Mr. Gross held 12% of his fund in TIPS at the end of March, the
same amount since October 2012, according to data from Pimco's
website. The share rose from 9% back in January 2012.
TIPS handed investors a loss of 0.4% this year through Thursday,
losing ground to regular Treasury bonds, which posted a return of
0.6% over the same period, according to data from Barclays.
Over the past 12 months, TIPS still handed investors a decent
return of 3.9%, beating 2.8% over regular Treasury bonds.
Investors, including Mr. Gross, had scooped up TIPS on worries
that major central banks' monetary stimulus could fuel inflation in
the longer term. The value of TIPS increases when consumer prices
rise, while the value of regular Treasury bonds will be eaten away
by inflation over time.
Write to Min Zeng at min.zeng@wsj.com
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