Pimco Sees Risk of Deflation
By Charles Sizemore· April 14, 2010
The manager of one of the biggest and most successful inflation-protected bond funds does not see inflation; he sees deflation.
If there was ever an investor that had every incentive to forecast inflation, it would be Mihir Worah, the manager of the Pimco Real Return Fund and the largest holder of inflation-protected bonds in the world. As the expression goes, when the only tool you have is a hammer, everything looks like a nail. Worah’s investment mandate is to protect his investors from inflation, so following the analogy, he should see inflation nails that need hammering around every corner.
But, as Bloomberg reported this morning,
Pimco is “underweight” inflation-linked bonds in portfolios that focus on the debt, Worah wrote in a report on Pimco’s Web site…. “There is a near-term risk of flipping to deflation given our view that developed economies have not fully healed and consumers are not yet ready to stand on their own two feet,” wrote Worah, a managing director based at Pimco’s Newport Beach, California, headquarters.
Worah echoes BlackRock Inc., the world’s biggest money manager with $3.35 trillion in assets, which said it is becoming bullish on Treasuries because “there isn’t inflation in the pipeline.” See article.
We’re starting to see some intelligent minds move to our camp in the inflation/deflation debate. Our view remains clear — there IS no inflation right now. We continue to see mild, Japan-style deflation as the most likely outcome of the credit crisis and deleveraging.
Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy
