Exchange traded funds that track Treasury inflation protected securities strengthened Thursday on huge demand from investors seeking to hedge against inflationary pressures.
The iShares TIPS Bond ETF (NYSEArca: TIP), the largest TIPS-related ETF, rose 0.2% Thursday. TIP has increased 4.7% year-to-date
On Thursday, a $13 billion auction of 10-year Treasury TIPS attracted the largest demand in two-years and brought in record purchases from bidders including foreign central banks, reports Cordell Eddings for Bloomberg.
“It speaks to the slowly more pervasive view that inflation might be turning the corner,” Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, said in the article. “The strength was surprising given how low real yields are.”
The spread between yields on benchmark 10-year Treasuries and same-maturity TIPS, or the break-even rate, widened by 5 basis points to 2.22 percentage points from as low as 2.17, the largest increase since April 17. To put this in perspective, the average spread over the past decade was 2.21 percentage points.
“Break-evens were cheap going into the auction, and that is why the auction went so well,” Michael Pond, head of global inflation-linked research at the primary dealer Barclays Plc., said in the article. “Given the realized inflation backdrop, break-evens offer value as realized inflation continues to tick up.”
The inflation rate rose to 1.1% in March year-over-year. The Federal Reserve has set a 2% inflation target, but the consumption expenditure index has remained stubbornly low for almost two years.
Bonds and Treasuries will loss value as living costs increase. However, TIPS are indexed to inflation as a way to hedge against rising consumer prices.
TIPS ETFs have also experienced increasing demand. So far this month, TIPS-related ETFs have attracted $129 million in assets, the first increase since March, compared to the $448 in redemptions over April. [Investors Look to TIPS ETFs to Hedge Against Inflation]
The iShares TIPS Bond ETF has an effective duration of 7.62 years. TIP has a 6.03% 30-day SEC yield.
In comparison, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) has a 7.52 year duration and a 2.19% 30-day SEC yield. IEF is up 5.0% year-to-date.
iShares TIPS Bond ETF
For more information on the Treasury Inflation Protected Securities, visit our TIPS category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of TIP.