(Bloomberg) -- Jeffrey Gundlach, who in late 2014 said "TIPS are for losers," now views Treasury Inflation Protected Securities as a good investment amid rising inflation.
"I like TIPS," Gundlach, CEO of DoubleLine Capital, said at a conference in San Diego Tuesday. "TIPS are for winners."
The securities have returned 7.5% in 2016, compared with a 4.5% gain for nominal U.S. sovereign debt, Bank of America indexes show. That also tops the 6.7% return for the S&P 500 Index, including reinvested dividends. Gundlach warmed up to TIPS this year and is among a group of investors, including Pimco and Goldman Sachs Asset Management, which see the outperformance continuing.
The yield on benchmark Treasury 10-year notes rose three basis points, or 0.03 percentage point, to 1.78% as of 9:37 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.5% security due in August 2026 fell 1/4, or $2.50 per $1,000 face amount, to 97 14/32.
The difference between yields on 10-year notes and similar-maturity TIPS, which shows investor expectations for average annual consumer-price gains over the period, reached 1.71 percentage points, the highest since May.
"The cyclical low for inflation rates has almost certainly past," said Peter Jolly, the global head of markets research at National Australia Bank in Sydney, who predicts headline consumer-price gains in the U.S. will rise above 3% early next year if oil prices remain at current levels. "That will help change market perceptions of inflation ahead, and put to rest deflation fears for now."
Australian fixed-income traders dropped bets for central bank easing in the coming year after data on Wednesday showed third-quarter inflation had quickened more than economists expected. That came after a report last week showed U.S. annual consumer-price gains reached the strongest pace since 2014 in September, while both U.K. and euro-area inflation rates are accelerating.
As well as a rebound in oil after OPEC in September agreed to cut supply for the first time in eight years, Federal Reserve Chair Janet Yellen this month set out an argument for keeping policy accommodative, even as traders prepare for higher interest rates come December.
Gundlach said last month TIPS were becoming a more attractive option for investors who want to own longer-term government bonds, though he hadn't begun buying them himself.
GAINS AFTER LOSSES
Pimco started 2016 by recommending the securities, in a continuation of a long-standing view. Goldman Sachs Asset Management wrote in a note to clients last week it was taking a long position in the securities on the expectation that inflation will pick up gradually. TIPS delivered a loss of almost 7% in the three years ended Dec. 31, 2015, compared with a 3.3% gain for nominal Treasuries.
The U.S. will auction $34 billion of five-year nominal notes and $15 billion of two-year floating-rate debt on Wednesday.
Morgan Stanley abandoned a prediction that U.S. break-even rates will fall earlier this month, after recommending a bearish position in July.
"The perception of inflation is already coming through in the global economy," Paul Donovan, the global chief economist at UBS, said in an interview on Bloomberg Television Wednesday. "It's too late to talk about inflation pressures. We're already there."