Pacific Investment Management Co. says U.S. inflation is poisedto quicken — at a time when costs are falling at the fastest pacein five years.

Pimco, which runs the world's biggest actively managed bondfund, said it likes Treasury Inflation Protected Securities.Federal Reserve efforts to spur the economy will push prices highenough to surprise investors, according to the company.

“We see value in U.S. inflation-linked bonds,” Scott Mather, thechief investment officer for U.S. core strategies, wrote on thecompany's website Wednesday. “The extraordinary policy response ofthe past few years could result in more inflation thanexpected.”

Investors will get to bet on Pimco's view in U.S. auctionsduring the next week, starting with a 30-year bond sale Thursday.The securities are among the most sensitive to inflation because oftheir long maturity, and they'd be most appealing to investors whosee costs holding in check. Fund managers who agree with Mather canbuy 10-year Treasury Inflation Protected Securities on June 16 and30-year TIPS on June 18.

Benchmark 10-year U.S. yields fell 1 basis points to 2.47percent as of 7:22 a.m. in London, according to Bloomberg BondTrader data. The price of the 2.125 percent note due May 2025 rose3/32, or 94 cents per $1,000 face amount, to 96 31/32.

Treasuries have tumbled this quarter as part of a global bondselloff triggered by a decline in Germany as investors balked atrecord-low yields. U.S. job growth beat analysts' expectations lastweek, underpinning forecasts for the Fed to boost borrowingcosts.

The result is a 2.7 percent loss since the end of March, whichwould be the biggest quarterly decline in six years, according toBank of America Merrill Lynch indexes.

The Fed has kept its benchmark, the target for overnight banklending, in a range of zero to 0.25 percent since 2008 to supportthe economy.

Costs are still falling, though the outlook for inflation ispicking up.

Consumer prices slid 0.2 percent in April from a year earlier,the biggest decline since 2009, according to the Labor Department.Bond investors are benefiting: the 10-year real yield climbed to2.68 percent on June 10, the highest level in five years.

Fed's Target

A bond metric known as the break-even rate, calculated by takingthe difference between yields on 10-year notes and similar-maturityTIPS, shows investors expect consumer prices to rise 1.89 percent ayear during the next decade. The figure has climbed from thisyear's low of 1.49 percent set in January, though it's still lessthan the Fed's 2 percent target.

Total Return, which is managed out of Pimco's office in NewportBeach, California, is aligning its investments with its views. Itcut almost two-thirds of its U.S. government and related debtholdings in May, according to the website.

With $107.3 billion in assets, the fund is second in size to the$118 billion Vanguard Total Bond Market Index Fund, which is basedin Valley Forge, Pennsylvania.

The inflation rate may actually rise “relatively quickly,”Mather wrote.

For that to happen, costs need to stop falling first.

Bloomberg News

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