Traditional inflation-hedging assets and related exchange traded funds are losing ground as the longest commodity decline in over two decades helped keep a lid on consumer prices.
For instance, inflation hedging tools such as Treasury Inflation Protected securities have underperformed traditional government debt assets. The iShares TIPS Bond ETF (NYSEArca: TIP), which has a 7.64 year duration, declined 1.3% over the past three months while the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.64 year duration, gained 0.7%.
Additionally, gold, another inflation-hedging tool, has also been under pressure, with the SPDR Gold Shares (NYSEArca: GLD) down 7.6% over the past three months.
Investors have been shifting out of the two asset classes. Over the past month, TIP experienced $531.9 million in outflows while GLD lost $1.01 billion in assets, according to ETF.com data.
Despite years of loose monetary policies, investors are growing less cautious over the inflationary outlook as a bumper crop year, rising oil supplies and a slowdown in Chinese demand for raw materials have all weighed down the commodities space.
For instance, the Bloomberg Commodity Index of 22 raw materials declined to a five-year low this week after data revealed consumer prices dipped in August for the first time in 16 months and the U.S. dollar continued to appreciate, Bloomberg reports.
The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), which tracks a broad basket of the 14 most heavily traded commodities, has decreased 12.5% over the past three months and is down 8.3% year-to-date. According to Bloomberg data, U.S.-listed exchange traded products that track raw materials experienced net outflows of $777.6 million since July.
The personal consumption expenditures index only rose 1.6% in the 12 months through July, and the index has consistently fallen short of the Federal Reserve’s 2% target since April 2012. [TIPS ETFs Won’t Find Support From Falling Inflation]
Additionally, the strong U.S. dollar and weak inflation abroad may signal lower inflationary pressure at home for a while.
“If the dollar ended up being very strong that would lead us to have fewer inflationary pressures in terms of our index,” Chicago Fed President Charles Evans said, the Wall Street Journal reports.
William Bednar and Edward S. Knotek II, Cleveland Fed researchers, argue that low inflation overseas, notably in Europe and Japan, have dragged on U.S. inflation and the trend will continue.
“To the extent that this global inflation trend continues to be a useful predictor of future domestic inflation, its ongoing low readings compared with the survey of professional forecasters’ long-run forecasts of 2% point to the potential for additional subdued U.S. inflation ahead,” the researchers said.
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Max Chen contributed to this article.