TIPS ETF Rises to All-Time High on QE3, Inflation Expectations

September 17th at 9:15am by John Spence

The largest ETF indexed to Treasury Inflation Protected Securities is trading at an all-time high in the wake of the Federal Reserve’s third round of quantitative easing, or QE3.

The iShares Barclays TIPS Bond Fund (NYSEArca: TIP) is moving higher with inflation expectations on central bank easing measures.

“The Fed’s actions last Thursday have been widely seen as a fundamental shift in its monetary policy, and its communications with the public. The tone of the FOMC’s statement, and of the Chairman’s subsequent press conference, clearly gave much less weight to the control of inflation than usual, and much more weight to the need to achieve a substantial reduction in unemployment,” Gavyn Davies writes in a Financial Times blog post.

“Certainly, the latest round of quantitative easing is the first to have occurred with little or no threat of deflation in the offing, and markets have responded by raising inflation expectations significantly,” Davies said.

The income that TIPS produce is based on Treasury yields as well as changes in the Consumer Price Index. Investors use TIPS to hedge inflation and protect the purchasing power of their dollars.

Investors have been buying TIPS this year even though they have negative yields. [TIPS ETFs Rise After Bonds Sell at Record Negative Yield]

“The Federal Reserve’s latest all-in, open-ended bond-purchase policy is shaking the nerves of investors thinking about the potential inflation effects of all that additional money in the financial system,” Deborah Levine writes for MarketWatch. “That’s boosted iShares Barclays TIPS Bond Fund (TIP) … Rising interest in the fund indicates more demand for protection from inflation.”

Some analysts watch the relative performance of TIP against iShares Barclays 7-10 Year Treasury Bond (NYSEArca: IEF) to gauge inflation expectations. The ETFs have similar durations, so when TIP is outperforming, it means inflation expectations are moving higher.

Michael Gayed in a MarketWatch commentary notes a “sharp spike is under way” in the ratio following the Fed’s QE3 announcement. A rising ratio “tends to coincide with a strong environment for risk assets,” he added.

The chart below shows the relative performance of TIP versus IEF.

Full disclosure: Tom Lydon’s clients own TIP.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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