With low inflationary pressure and the cost of living in the U.S. unexpectedly lower in August, Treasury inflation protected securities and related exchange traded funds may continue to underperform U.S. Treasuries.
The iShares TIPS Bond ETF (NYSEArca: TIP) dipped 0.5% Wednesday, whereas the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) was down 0.1%. Year-to-date, TIP has gained 4.2% while IEF increased 5.2%. TIP has a 7.62 year duration and a 0.95% 30-day SEC yield, and IEF has a 7.65 year duration and a 2.17% 30-day SECY yield. [TIPS ETFs Fall Behind As Inflationary Pressure Slows]
TIPS are a type of government bond whose face value rises with inflation, and with inflation falling, the securities could continue to fall behind traditional Treasury bonds.
According to the Labor Department, the consumer price index decreased 0.2% over August, the first decline since April 2013, reports Michelle Jamrisko for Bloomberg. The core measure, which excludes volatile food and fuel prices, was unchanged, the first time it failed to rise in almost four years.
In comparison, the Federal Reserve has set a 2% inflation goal based on the personal consumption expenditures index, which currently sits at around 1.6% for the 12-months through July and has not breached the 2% level since April 2012.
Stifling inflationary pressures, a slowdown in global growth has lead to a decline in energy and other commodity prices.
Given the low inflation levels and moderate economic growth, the Fed pledged to keep interest rates near zero for a “considerable time.”
“With inflation below target and no indication of an acceleration, the first increase in the fed funds rate, the central bank’s key short-term rate, will not come until July 2015,” Stuart Hoffman, chief economist at PNC Financial Services Group, said in a Wall Street Journal article.
Meanwhile, the inflation break-even rates – the yield difference between U.S. TIPS and regular Treasuries – shrank in response to the lower reading in the Consumer Price Index, with 10-year TIPS break-even rate falling to their lowest in about a year ahead of a $13 billion auction Thursday, Reuters reports.
iShares TIPS Bond ETF
For more information on inflation, visit our inflation category.
Max Chen contributed to this article.