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Pictet Buys U.S. TIPS as Stimulus Stokes Inflation

Pictet Buys U.S. TIPS as Stimulus Stokes Inflation (Update1)
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By Anchalee Worrachate

Aug. 21 (Bloomberg) -- Pictet Asset Management, which manages $60 billion in fixed-income assets, is buying U.S. inflation-protected bonds, betting that the government’s economic-stimulus measures will fuel price growth.

The company will use dips in the market to increase holdings in Treasury Inflation Protected Securities, or TIPS, said Mickael Benhaim, head of global bonds at the investment unit of Pictet & Cie., Switzerland’s largest closely held private bank. The U.S. has pumped so much money into the economy that inflation is inevitable, irrespective of whether the Federal Reserve ends its quantitative-easing program, he said.

“Inflation may not be an immediate threat, but it will be an issue down the road, given the massive amount of cash sloshing in the system,” Benhaim said in a phone interview from Geneva. “It doesn’t matter if they stop the plan. The current policy will lead to inflation. We have no plan to take profits in TIPS at this point, and are likely to buy more on setbacks.”

The Fed, led by Chairman Ben S. Bernanke, has cut its target interest rate to a record low and began buying Treasuries in March to end a crisis that has cost financial companies worldwide about $1.6 trillion in writedowns and losses since the start of 2007. The asset-purchase program has injected $262 billion into the U.S. economy.

TIPS beat nominal Treasuries this year, handing investors 6.5 percent while regular bonds lost 3.5 percent, according to Merrill Lynch & Co. indexes.

‘Not Done Deal’

The Fed said on Aug. 12 it plans to slow purchases of Treasuries as the recession eases, and signaled the program, for which it has earmarked $300 billion, will end in October.

“It’s not a done deal,” Benhaim said, who has been building his holdings of TIPS since November. “They didn’t say explicitly they’re going to end it, and we can’t rule out the possibility that the Fed may extend the program.”

Billionaire investor Warren Buffett said on Aug. 18 that the U.S. must address the massive amount of “monetary medicine” that has been pumped into the financial system and now poses a threat to the economy and the dollar.

The U.S. 10-year breakeven rate, a gauge of investor expectations for inflation that measures the difference in yield between index-linked and conventional bonds, rose to 190 basis points today, from 9 basis points at the start of the year. The spread has averaged 220 basis points in the past five years.

“The U.S. breakeven rate has room to widen further.” Benhaim said.

There’s little evidence the Fed’s purchases are stoking inflation. Consumer prices declined 2.1 percent in July from a year earlier, and were unchanged from the previous month, according to a Labor Department report on Aug. 14.

“Our view is that core inflation may recede in the near- term, but it’s something that might be a problem later in 2010,” Benhaim said. “The market rarely prices an event when it materializes. It always does it beforehand, and that’s why we think our strategy is right.”

To contact the reporter on this story: Anchalee Worrachate in London at