With U.S. consumer prices recording their largest decline in six years, Treasury Inflation-Protected securities and related exchange traded funds continue to underperform traditional government debt assets.
Over the past year, the iShares TIPS Bond ETF (NYSEArca: TIP), which has a 7.66 year duration, increased 4.7%, whereas the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.73 year duration, rose 11.7%. [Inflation-Hedge ETFs Struggle as Commodity Prices Drop]
The Labor Department revealed that its Consumer Price Index dipped 0.4% last month, the largest drop since December 2008, reports Lucia Mutikani for Reuters. In the year through December, the CPI only rose 0.8%, the weakest increase since October 2009.
The “core” CPI, which excludes food and energy costs, remained unchanged in December, the second time since 2010 that it did not rise. For the year through December, core CPI was up 1.6%, the smallest gain since February.
In contrast, the U.S. Federal Reserve is targeting an inflation rate of about 2%.
Additionally, looking at the Fed’s preferred inflation gauge, the Commerce Department’s consumption expenditure price index, inflation has undershot 2% for over two-and-a-half years.
The sudden plunge in oil prices has helped keep prices low, but the Fed believes the drop in oil prices will only be short-term. However, the stronger dollar is a dominant factor in keeping commodity prices depressed.
Consequently, the low-inflation environment is also fueling bets that the Fed could push off any interest rate hikes.
“The odds of a rate hike in June are fading fast,” Michelle Girard, chief economist at RBS, said in the Reuters article. “The recent data cannot leave the Fed feeling more confident that inflation will move higher.”
If the Fed raises rates too soon, it could raise deflationary pressures, which could send the economy into a spiraling decline as cash becomes more valuable, prices continue to fall and Americans withhold spending to buy something cheaper tomorrow. [ETFs for a Deflationary Period]
iShares TIPS Bond ETF
For more information on Treasury Inflation Protected Securities, visit our TIPS category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.