With U.S. consumer prices recording their largest decline in six years, Treasury Inflation-Protected securities and related exchange traded funds continue to underperform traditional government debt assets.
Over the past year, the iShares TIPS Bond ETF (NYSEArca: TIP), which has a 7.66 year duration, increased 4.7%, whereas the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.73 year duration, rose 11.7%. [Inflation-Hedge ETFs Struggle as Commodity Prices Drop]
The Labor Department revealed that its Consumer Price Index dipped 0.4% last month, the largest drop since December 2008, reports Lucia Mutikani for Reuters. In the year through December, the CPI only rose 0.8%, the weakest increase since October 2009.
The “core” CPI, which excludes food and energy costs, remained unchanged in December, the second time since 2010 that it did not rise. For the year through December, core CPI was up 1.6%, the smallest gain since February.
In contrast, the U.S. Federal Reserve is targeting an inflation rate of about 2%.
Additionally, looking at the Fed’s preferred inflation gauge, the Commerce Department’s consumption expenditure price index, inflation has undershot 2% for over two-and-a-half years.
The sudden plunge in oil prices has helped keep prices low, but the Fed believes the drop in oil prices will only be short-term. However, the stronger dollar is a dominant factor in keeping commodity prices depressed.
Consequently, the low-inflation environment is also fueling bets that the Fed could push off any interest rate hikes.