The iShares TIPS Bond ETF (NYSEArca: TIP) traded lower for the thirteenth straight day on Wednesday following a report that U.S. producer prices in April declined by the most in three years.
ETFs that invest in Treasury Inflation Protected Securities have been falling harder than nominal Treasuries of similar durations, suggesting investors are scaling back their inflation expectations. Meanwhile, commodities are falling even though the Federal Reserve continues to pump liquidity.
On Wednesday, the Labor Department said the producer price index declined 0.7% last month. [iShares: Time to Skip the TIPS?]
“Slow growth in the U.S. and abroad is holding input-price gains in check for American factories,” Bloomberg reports. “Absent a surge in inflation, policy makers at the Federal Reserve have the option of weighing whether the U.S. economic expansion needs more stimulus to pick up.”
“With previous falls in some commodity prices still to feed through, a further fall in producer price inflation is on the cards,” said Paul Dales, senior U.S. economist at Capital Economics, in a Reuters article.
On Thursday, investors will get the April update on the consumer price index — economists are forecasting a decline. In March, the CPI fell 0.2% on cheaper gasoline prices.
The Federal Reserve’s inflation target is 2% and the central bank says it will continue to buy bonds until the job market gets back on track.
TIP, which has a weighted average maturity of about 9 years, has fallen harder than iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) so far this year.
Next page: TIPS — Watch out if rates rise faster than inflation
TIP holds assets of $19.8 billion. Year to date, investors have pulled $2.1 billion from TIP. The ETF is third on the list for heaviest outflows in 2013, according to IndexUniverse data. [TIPS ETFs See Outflows as Investors Scale Back Inflation Bets]
With TIPS, the principal is linked to changes in the CPI. However, the bonds are also sensitive to interest rates just like regulatory Treasuries. Therefore, TIPS can lose value if Treasury yields rise. [TIPS ETFs: Watch Out if Rates Rise Faster than Inflation]
For TIPS ETF investors, the inflation “breakeven rate” is important to watch. It is determined by comparing the yields of regular government bonds against inflation-protected securities of the same duration, usually 10 years. If inflation averages more than the breakeven rate over the next decade, then investors would be better off owning TIPS than normal Treasury bonds. [TIPS ETF with Negative Yield Sees Outflow]
iShares TIPS Bond ETF
Full disclosure: Tom Lydon’s clients own TIP.