(Bloomberg) — Regardless of what typical Americans think about the Patient Protection and Affordable Care Act (PPACA), investors in U.S. Treasuries think the law is reining in health care costs.
After doubling in the past two decades, medical expenses rose less last year than at any time since Harry S. Truman was president in 1949, helped by Medicare reimbursement cuts.
The rollout of PPACA hold down consumer prices for years, BNP Paribas SA. and Credit Suisse Group A.G. said.
Less inflation, which boosts the purchasing power of fixed-rate payments, may help attract buyers to Treasuries as the economy strengthens and the Federal Reserve pares its own bond buying.
While yields have fallen this year, the compensation 10-year notes provide after inflation is close to the highest in five years.
Excluding the effects of changes in the cost of food and energy, inflation has risen just 1.1 percent in the past 12-month period, down from 2 percent in the previous 12-month period.
Growing stability in health care costs accounted for one-third of the drop in what the Fed thinks of as the core inflation rate.
"This is good news" for bonds, Kathy Jones, a fixed-income strategist at Charles Schwab & Co., said in a telephone interview. By holding costs down, "it may be a benefit to inflation, longer-term."
Jones, who has been advising clients on the bond-market implications of PPACA, is recommending that investors buy 10-year Treasuries because low inflation will keep the Fed from lifting interest rates.
Costs for medical care increased just 2 percent last year. That's the smallest gain in 65 years, according to data compiled by the U.S. Labor Department.
Price increases eased as Medicare reimbursements were cut under last year's budget sequestration and Americans gained access to more generic drugs.
In the two decades before the financial crisis, health-care expenses rose at more than twice that rate on an annual basis.
The slowdown in medical expenses has helped curb inflationary pressures, with living costs rising 1.48 percent in 2013, the least during an expansion in 39 years.
"Inflation is already very low, so having one more category that lowers it even more makes nominal Treasuries even more attractive," Aaron Kohli, an interest-rate strategist at BNP Paribas, one of 22 primary dealers that trade with the Fed, said in a telephone interview.
Consumer prices in March rose 1.5 percent from a year earlier and increased 0.2 percent from the previous month, according to government data released today.
Using the Fed's preferred gauge of inflation, known as the personal consumption expenditures deflator, or PCE, health care is having an even greater impact on efforts to contain prices.
