Pimco Predicts Inflation, Joining Buffett, Marc Faber

Pimco Predicts Inflation, Joining Buffett, Marc Faber (Update3)
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By Wes Goodman

March 11 (Bloomberg) -- Pacific Investment Management Co. which runs the world’s biggest bond fund, joined investors Warren Buffett and Marc Faber in saying inflation will quicken, sounding a warning for Treasury investors.

U.S. government and Federal Reserve efforts to snap the recession will increase costs for goods and services as soon as 2010, Pimco said in a report today on its Web site by Chris Caltagirone and Bob Greer. Commodity producers are also delaying projects, which may limit supply and lead to higher prices when global growth resumes, according to Pimco.

“Inflation will rise,” Pimco said. Treasury securities that give investors protection against higher prices in the economy are “attractive now.”

Pimco is among a growing list of investors who are warning that programs to counter the U.S. slump will increase consumer prices as the economy starts to revive. Investor Jim Rogers, author of the books “Hot Commodities” and “Adventure Capitalist,” said this week U.S. policies will hurt conventional Treasuries, those that don’t offer inflation protection.

President Barack Obama is asking Congress to pass a budget that will result in a record $1.75 trillion deficit. He has already signed into law a $787 billion package of tax cuts and government spending.

Rate Cut

Fed policy makers cut the target for overnight loans between banks to a range of zero to 0.25 percent in December, and the central bank has more than doubled its assets to $1.9 trillion in the past year.

U.S. yields indicate inflation forecasts rose this year.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 87 basis points from nine basis points on Dec. 31. The spread has averaged 2.27 percentage points for the past five years.

Conventional Treasuries returned 5.7 percent over the past 12 months, according to Merrill Lynch & Co.’s U.S. Master index, as the deepening U.S. recession led investors to seek the relative safety of government debt.

TIPS fell 9.5 percent, based on Merrill’s inflation-linked index, indicating investors saw less need to protect themselves against rising prices for goods and services.

The yield on conventional 10-year notes was little changed today at 3 percent as of 6:01 a.m. in London.

Buffett, the billionaire investor, said March 9 on the CNBC television network that efforts to stimulate a recovery may lead to inflation rates exceeding those in the 1970s.

Inflation Rate

The U.S. consumer price index was unchanged in the 12 months ended Jan. 31, according to the Labor Department, meaning bond investors aren’t losing anything to inflation now. The index climbed to 14.8 percent in March 1980, the highest level since the 1940s.

In Japan, the biggest economy after the U.S., consumer prices failed to rise in January for the first time in more than a year. China’s prices declined in February for the first time since 2002, the statistics bureau said yesterday.

Faber, publisher of the Gloom, Boom and Doom Report, said on March 9 on Bloomberg Television that the U.S. is laying the foundation for an increase in prices.

“The massive money printing we have and the massive deficits we have now will make it difficult when there are some price pressures for the Federal Reserve to actually increase interest rates,” Faber said.

Monthly Loss

Pimco’s CommodityRealReturn Strategy Portfolio handed investors a loss of 9.8 percent in the past month, underperforming 70 percent of its competitors, according to data compiled by Bloomberg.

Bill Gross, manager of the company’s $138 billion Total Return Fund, increased his holdings of U.S. government debt to 15 percent in February.

Gross also boosted the world’s biggest bond fund’s holdings in mortgage-backed securities to 86 percent of total assets, up from 83 percent last month, according to the Newport Beach, California-based company’s Web site.

While the government debt category includes Treasuries, Gross has said in the past that Pimco is not interested in buying the securities.

Gross missed out on the biggest Treasury market rally in 14 years in 2008, saying yields were too low because inflation will accelerate as the deficit surges. The fund returned an average of 4.37 percent over the past five years, beating 98 percent of its peers, Bloomberg data show.

Rogers said March 9 that sovereign bonds are poised to fall. Inflation erodes a bond’s fixed payments.

“Governments are printing money everywhere, borrowing stupendous amounts,” he said. “Throughout history that has led to problems in the bond markets, and it will this time too.”

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
Last Updated: March 11, 2009 02:37 EDT