An informal survey of US institutional investors by Barclays Capital found a consensus around the idea that the Fed will tighten interest rates later rather than sooner and that inflation will be higher in 2004. The surveys also identified a desire among investors for longer-dated inflation-proofed Treasury bonds (TIPS).
Barclays Capital surveyed 148 institutional investors and issuers attending its Eighth Annual Global Inflation-Linked Bond Conference held this week in Key Biscayne, Florida. The electronic-audience response survey was conducted live during the conference on Monday and Tuesday. The audience included over 120 investors, primarily large institutional fixed income investors, representing approximately 30% of the buy-side of the market. Also in attendance were about 20 representatives of issuers, largely governments, from the US, UK, France, Sweden, and Italy.
29% thought the Fed would first tighten in the fourth quarter of this year, while 42% thought the Fed would not tighten until 2005. 53% expect 2004 inflation at 1% – 2%, while 41% expect 2004 inflation at 2% – 3% the participants favored a move toward longer dated inflation-linked securities – with 97% favoring some form of 20 year maturity compared to only 3% favoring a 3 to 5 year maturity.
“These data implicitly suggest that bond yields are headed up,” says Larry Kantor, Head of Economics and Market Strategy at Barclays Capital. “The investors represented in this survey believe that the Fed will hold the Fed Funds rate at 1% even as inflation edges higher.”
Also attending the conference was John Brynjolfsson of PIMCO Investment Company, who has been a buyer of US Treasury Inflation Protected Securities (TIPS). “More than ever before investors seem to be comfortable with incorporating inflation-linked securities into their portfolios,” he says. “They are seeking more inflation-linked issuance, more products and more long-dated maturities. The market is beginning to mature.”