BlackRock joins Pimco warning investors to seek inflation hedge

BlackRock Inc. joined Pacific Investment Management Co. in recommending inflation-linked bonds and warning costs are poised to pick up. "Stabilizing oil prices and a tighter labor market could contribute to rising actual, and expected, U.S. inflation," Richard Turnill, BlackRock's global chief investment strategist, wrote Monday on the company's website. "We like inflation-linked bonds and gold as diversifiers." New York-based BlackRock manages $4.6 trillion.

Federal Reserve Chair Janet Yellen will get a chance to give her views in a speech Tuesday at 12:20 p.m. in New York. Pimco, which manages the $87.8 billion Total Return Fund, and BlackRock have both told investors this year that inflation is picking up. Fed officials Stanley Fischer and James Bullard chimed in this month to say costs are increasing, driving speculation the central bank is moving closer to raising interest rates.

The U.S. 10-year note yield fell two basis points, or 0.02 percentage point, to 1.87 percent as of 10:36 a.m. London time, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 rose 5/32, or $1.56 per $1,000 face amount, to 97 26/32.

The Treasury Department is scheduled to sell $34 billion of fiveyear notes on Tuesday, which yielded 1.37 percent in pre-auction trading.

The BlackRock Inflation Protected Bond Portfolio has lost 1.5 percent during the past 12 months, while the Pimco Real Return Fund has lost 1.8 percent, based on data compiled by Bloomberg. Both funds were beaten by more than 60 percent of their peers.

"It's a very cheap hedge to buy inflation-linked bonds at the moment," said Jens Peter Soerensen, chief analyst at Danske Bank A/S in Copenhagen. "If oil prices bounce back to $60-$70, then you can get a short-term spike in inflation and then you can gain in your linker bonds."

The Treasury market inflation outlook and oil prices have both risen from lows for the year set in February. A government report April 1 will show U.S. employers added 210,000 workers in March, after hiring 242,000 in February, according to a Bloomberg survey of economists.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has increased to 1.56 percentage points from as low as 1.12 on Feb. 11. It's still below its average of 2.08 for the past decade.

"Inflation expectations have increased recently with commodity prices," said Will Tseng, a bond manager in Taipei for Mirae Asset Global Investments Co., which oversees $73 billion. "The risk is that the Fed will get more hawkish." Tseng said he's selling emerging-market bonds to trim his holdings of riskier securities and holding the proceeds in cash. He's avoiding buying more Treasuries in case Fed comments send yields higher, he said.

The Fed's preferred inflation gauge rose 1 percent in February, a report showed Monday, half of the central bank's target of 2 percent.

"We may well at present be seeing the first stirrings of an increase in the inflation rate -- something that we would like to happen," Fischer, vice chairman of the Fed Board of Governors, said this month.