Pacific Investment Management Co. says U.S. inflation is poised to quicken — at a time when costs are falling at the fastest pace in five years.

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

“We see value in U.S. inflation-linked bonds,” Scott Mather, the chief investment officer for U.S. core strategies, wrote on the company's website Wednesday. “The extraordinary policy response of the past few years could result in more inflation than expected.”

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

Benchmark 10-year U.S. yields fell 1 basis points to 2.47 percent as of 7:22 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.125 percent note due May 2025 rose 3/32, or 94 cents per $1,000 face amount, to 96 31/32.

Treasuries have tumbled this quarter as part of a global bond selloff triggered by a decline in Germany as investors balked at record-low yields. U.S. job growth beat analysts' expectations last week, underpinning forecasts for the Fed to boost borrowing costs.

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

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

Costs are still falling, though the outlook for inflation is picking 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 to 2.68 percent on June 10, the highest level in five years.

Fed's Target

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

Total Return, which is managed out of Pimco's office in Newport Beach, California, is aligning its investments with its views. It cut almost two-thirds of its U.S. government and related debt holdings 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 based in 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

Instant Insights /

Pimco Issues Inflation Warning

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