Invest in inflation protected securities... its going to get ugly.

‘Printing Money’ Makes TIPS a Buy, Credit Suisse’s Jersey Says

By Thomas R. Keene and Cordell Eddings

Dec. 3 (Bloomberg) -- U.S. actions meant to thaw credit markets will lead to inflation, making Treasury Inflation Protected Securities attractive, said Ira Jersey, an interest- rate strategist at Credit Suisse Group AG.
“The Federal Reserve is increasing its balance sheet and now printing money, and that’s all quantitative easing is, printing money,” Jersey said in an interview with Bloomberg Radio in New York. “Ultimately this ends with inflation being significantly higher than the market is anticipating right now. Things like TIPS in 10 or 20 years are a better value.”
Traders’ expectations for inflation over the next decade have waned as the U.S. recession deepened and the price of crude oil sank more than 68 percent from a record in July, yields show. The difference between rates on 10-year TIPS and conventional notes touched a record low of negative 8 basis points on Nov. 20. The so-called breakeven rate was 49 basis points today.
Credit Suisse reversed its forecast for a steeper Treasury yield curve after Fed Chairman Ben S. Bernanke said Dec. 1 that the central bank would consider buying U.S. government debt and target long-term interest rates. Yields on all maturities of Treasuries have dropped to record lows, with the 30-year bond touching 3.1655 percent yesterday.
“I’m not sure there is a lot of value in the 30-year sector,” Jersey said. “In the very long end you have a big need for duration in the market. Pension plans and insurance companies who are attempting to match their liabilities with assets, particularly fixed-income assets, mean the long end has been much tighter and much lower than it would be normally.”
Duration is a measure of price sensitivity to interest-rate change expressed as a number of years.
Jersey also said there is value in the corporate market, where BBB-rated industrial debt is priced at default rates higher than those seen during the Depression.
“The question is do you think things are going to be worse than the Great Depression?” said Jersey. “We don’t think so.”

To contact the reporter on this story: Cordell Eddings in New York at ceddings3@bloomberg.netThomas R. Keene in New York at tkeene@bloomberg.net Last Updated: December 3, 2008 13:11 EST