Morgan Stanley's Caron sees appeal in TIPS

NEW YORK (Reuters) - U.S. inflation bonds will offer a safe haven for bond investors jittery about rising price pressures from oil and food, a top U.S.-based interest rate strategist said on Tuesday.

Compared with other investments, Treasury inflation-protected securities (TIPS) have earned the second highest total return so far this year, behind only commodities, according to James Caron, head of global rates research at Morgan Stanley.

TIPS "will be a strong performing asset class," Caron told the Reuters Investment Outlook Summit in New York.

Real yields on regular Treasuries are expected to fall, with the Federal Reserve seen holding short-term interest rates steady, and Caron sees U.S. inflation jumping as high as 5.5 percent this summer, which will bolster the overall return on

TIPS.

Caron forecast the government's consumer price index, its broadest inflation gauge to run at 3.9 percent on a year-over-year basis in May, unchanged from April. The May CPI figures will be released on Friday.

The interest and principal payments on TIPS are indexed against the CPI, thus protecting investors against rising inflation.

According to Lehman Brothers, the year-to-date return on TIPS was 3.59 percent, more than double the 1.70 percent on regular Treasuries.

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Richard Leong; Editing by Leslie Adler)