Azernews.Az

By Bloomberg

Doom-mongers have been warning to brace for inflation in the U.S. ever since the Federal Reserve started buying bonds six years ago.

The real risk isn’t in America but in Europe, Pioneer Investments says.

European Central Bank President Mario Draghi will be successful in heading off the threat of deflation and spurring the cost of living, said Cosimo Marasciulo, Pioneer’s head of European government bonds. And he’s betting on it using debt- market derivatives.

The Federal Reserve will quash inflation by raising interest rates, he said.

“In the euro zone, you have a central bank which is still pushing hard in terms of stimulus, and that’s good for inflation,” Marasciulo said in an interview Tuesday in Singapore. “In the U.S., you have a central bank which might actually hike rates between June and September. The market thinks, when the Fed hikes rates, any inflation pressure will be contained.”

Inflation-linked bonds in Europe returned 11 percent in the past year through Tuesday, based on Bank of America Corp. indexes. In the U.S., they gained 3.9 percent, the indexes show.

In trading today, the benchmark U.S. 10-year yield was little changed at 1.9 percent as of 1:19 p.m. in Tokyo, according to Bloomberg Bond Trader data.

Pumping Money

Draghi in January announced a bond-buying plan known as quantitative easing to counter the threat of deflation by pumping money into the banking system.

The euro has weakened 11 percent against the dollar this year, helping to support growth among the 19 countries sharing the currency because it makes their exports relatively more attractive.

Euro-area economic sentiment climbed to the highest level in almost four years in March. A slump in euro-area consumer prices eased.

The Fed used its own quantitative-easing program from 2008 through 2014, though it’s now considering raising interest rates.

In 2010, a group of 23 people including Stanford University Professor John Taylor wrote to Ben S. Bernanke, who was the central bank chairman at the time, to warn the program risked sparking inflation. Almost five years later, the Fed’s preferred gauge of costs is rising at a pace of just 0.3 percent, versus its target of 2 percent.

The ECB will have more luck, said Marasciulo, who is based in Dublin for Pioneer, which has $240 billion in assets.

“Things are improving” in Europe, Marasciulo said. “When you look at the growth and inflation data, they were improving even before QE was announced. I think that what we will see in the next few quarters or so is even higher upward revisions on growth and inflation.”