STOCK MARKET WATCH -- Monday, 15 December 2014

[xchrom]

12. Wall Street Can’t Stop Stripping Bonds as Inflation Deemed Dead

http://www.bloomberg.com/news/2014-12-15/wall-street-can-t-stop-stripping-bonds-as-inflation-deemed-dead.html

An obscure corner of the $12.4 trillion market for U.S. government debt is providing one of the clearest signs yet that bond investors are writing off the threat of inflation for years, if not decades, to come.

Demand for Strips, created when Wall Street banks separate the interest payments from the principal of U.S. debt and sell each at a discount, has boosted the amount outstanding to an average $211 billion this year, the most since 1999, data from the Treasury Department show. The securities, the most vulnerable to inflation of all U.S. government bonds, posted the biggest returns this year by rallying almost 50 percent.

While forecasters say the world’s largest economy will grow at the fastest pace in a decade next year and expose the securities to the deepest potential declines, debt investors are signaling their skepticism as commodities plunge and slowdowns in Europe and Asia threaten the U.S. recovery. Last week, the bond market’s outlook for inflation over the next three decades fell below 1.9 percent annually, the lowest in three years.

“The marketplace feels pretty comfortable that inflation is going to be contained,” Tom Girard, the head of fixed-income investments at NYL Investors, which oversees $200 billion and owns Strips, said by telephone on Dec. 11. There are still “some headwinds that the economy is facing.”