Inflation Expectations

Growing demand for ETFs that hold inflation-protected Treasuries may indicate that bond buyers expect inflation to pick up soon.

The Federal Reserve’s attempt to lift inflation to a level that would reflect a healthier U.S. economy is starting to take hold in the bond market.

For the first time in 19 months, investors are stepping up their buying of exchange-traded funds (ETFs) that hold Treasuries tied to cost-of-living increases, data compiled by Bloomberg show. At the same time, inflation expectations over the next five years surpassed 2 percent to reach the highest level since May after a government report showed hourly earnings among U.S. workers jumped more on average in February than economists forecast.

“Inflation may move up higher than people think,” David Leduc, the chief investment officer at Standish Mellon Asset Management Co., which manages $160 billion, said in a telephone interview. This month the Boston-based firm began buying TIPS with maturities as long as five years, he said.

After falling to a four-year low of 1 percent in October, the annual inflation rate has risen for three straight months to reach 1.6 percent in January, data compiled by Bloomberg show. Economists in a Bloomberg survey anticipate the cost of living will rise 1.7 percent this year and 2 percent in 2015.

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