Treasury Inflation Protected Securities exchange traded funds have underperformed traditional Treasuries, with TIPS set to see their worst annual decline since they first began trading, as inflation failed to rear its ugly head.
The iShares TIPS Bond ETF (NYSEArca: TIP), which has a 7.55 real yield duration and a 0.06% 30-day SEC yield, declined 8.0% year-to-date. Meanwhile, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.59 effective duration and a 2.4% 30-day SEC yield, is down 4.9% year-to-date. [Cash Rushes out of Treasury ETFs]
According to Bank of America Merrill Lynch indexes, TIPS fell 8.8% this year after inflation stayed relatively subdued this year, Bloomberg reports. For instance, consumer prices in the U.S. only inched up 1% last month, the smallest increase since 2009
“The idea that central banks can always get the inflation rate they want is something that’s going to pass away,” Peter Fisher, the former Fed official and undersecretary for domestic finance at the U.S. Treasury, who now serves as senior managing director at BlackRock Inc., said in the article. “We could be at a 1 percent inflation rate for a long time.”
Treasury Inflation Protected Securities, or TIPS, are a type of Treasury security indexed to inflation that help investors mitigate the negative effects of a rising Consumer Price Index. [Dull CPI, Rising Rates Have Inflation-Indexed ETFs Seeing Red]
“When inflation is falling or extremely low, TIPS are not a great investment vehicle,” Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s private wealth management unit, said in the article. “I’m avoiding TIPS. I don’t see inflation becoming an issue over the next three to six months.”