From T Rowe Price Manager Commentary for PRIPX- Inflation Protected Bond Fund (12-31-11) - "Despite some pickup in inflation pressures, we do not anticipate a rate hike until at least mid-2013. The Fed's efforts to bring down long-term interest rates by trading short-term Treasury holdings for longer-term bonds is set to run through the middle of 2012, and more action from the central bank is likely if economic growth lags policymakers' expectations. Despite continued accommodative monetary policy, we feel rates will eventually rise from their current levels. We continue to underweight short and intermediate securities as we feel they will be most affected when monetary policy eventually tightens."
Found this interesting - expected longer dated bonds would suffer most. Perhaps the fact they are investing in TIPS accounts for the aberration?
http://www3.troweprice.com/fb2/fbkweb/management.do?ticker=PRIPX(Links to "Commentary" page. You still need to click "Outlook" tab)
Comments
That's what happened in the last Fed-initiated rate rise, mid-04 to mid-06; the phenomenon is called "bear flattening," i.e., the yield curve flattens from rates rising at the shorter end. Vanguard had a good paper on it that was published online a couple of years ago, but I can't find it in a search now.
The inflation adjustment apparently wasn't a factor in 04-06; it was true for bonds in general.
I don't know what the likelihood is of the same process playing out the next time, but the TRP outlook you linked makes it sound like a strong possibility.
AJ