U.S. Inflation Alarm Fading

TIPS market suggests the Fed’s bond purchases won’t trigger inflation.

Bill Gross, who runs the world’s biggest bond fund, says the Federal Reserve’s open-ended plan to flood the economy with $40 billion a month will ignite inflation. The options market is signaling that won’t happen anytime soon.

Demand to protect against higher long-term bond yields over the next six months has been static since Fed Chairman Ben S. Bernanke announced a third round of quantitative easing, or QE3, Sept. 13, Barclays Plc data shows. Appetite, though, is rising for options that mature in 2015. Traders’ expectations for consumer price increases as measured by inflation-protected Treasuries have fallen from the highest levels since 2006.

Payer Skew

The Barclays data measures what traders call the payer skew using options on interest-rate swaps. The skew typically widens when traders anticipate a rise in yields as they seek to hedge the value of their holdings. It’s now 25 cents for the shorter term, about unchanged from December, while it’s 89 cents for options that mature in 2015, up from 80 cents at the end of 2011. Each 10 cents represents $100,000 of bonds.

Election Issue

The consumer price index rose 1.7 percent in August. Bond yield have been mostly below the gauge since April 2011, resulting in negative real yields.

Wages, Spending

Bernanke is getting help from the weak labor market. The government may say Oct. 5 that the unemployment rate held above 8 percent for the 44th straight month in September, according to the median estimate of more than 60 economists by Bloomberg.

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