A BNP Paribas sign is seen on a building of the bank in Geneva. The Paris-based lender joins banks including Goldman Sachs and Credit Agricole that say inflation expectations implied by bond yields underestimate the potential for consumer prices to rise at a pace closer to their long-term average.

Bloomberg
New York


Count BNP Paribas SA among the growing list of firms recommending investors load up on securities set to profit from rising US consumer prices.
The Paris-based lender joins banks including Goldman Sachs Group and Credit Agricole SA that say inflation expectations implied by bond yields underestimate the potential for consumer prices to rise at a pace closer to their long-term average. They expect the recovery to be driven by US economic growth and stabilising energy costs.
A rebound in the bond market’s inflation view would signal investors are gaining confidence in the Federal Reserve’s ability to increase interest rates without harming the economy. It would also show they’re starting to buy into Fed officials’ view that falling commodity prices will have only a “transitory” damping effect on inflation. BNP recommends betting that the 10-year break-even rate - the gap between yields on regular Treasury notes and inflation-linked debt of that maturity - will rise. The view echoes Goldman Sachs, which lists the trade among its top recommendations for 2016.
“The break-even at the moment is way too low,” said David Keeble, head of fixed-income strategy at Credit Agricole’s New York office. “Inflation will pick up quite aggressively in annual terms come January.”
The 10-year break-even rate has rebounded from a six-year low set in September. It climbed one basis point, or 0.01 percentage point, to 1.62 percentage points Friday, the highest since August 31 on a closing basis. Analysts at Keeble’s firm predict the measure will rise to 2.1 percentage points over the next year, which would be the highest since September 2014.
Yields on the 10-year Treasury note fell one basis point to 2.24% in New York, according to Bloomberg Bond Trader data. The price on the 2.25% security due in November 2025 rose 3/32, or 94 cents per $1,000 face amount, to 100 1/8.
BNP said in a note last week that inflation had “troughed,” warning traders against being lulled by the promise of gradual rate increases by the Fed and the Bank of England, and forecasts for further monetary stimulus out of Europe and Japan. The bank forecasts US consumer prices will rise 1.8% in 2016, versus about 0.1% in 2015.
Traders see a 68% chance of a Fed interest-rate increase by the end of 2015, according to data compiled by Bloomberg. The calculation assumes the effective federal funds rate will average 0.375% after liftoff, compared with the latest effective rate of 0.12%.
Traders are betting the effective rate will rise to 0.75% in the next 12 months, which would imply at least two interest-rate increases in that period.