After bleeding assets in 2013 and 2014, the iShares TIPS Bond ETF (NYSEArca: TIP) is suddenly back in favor as some fixed income traders are betting U.S. consumer prices are bound to rise.
TIP “attracted $634 million last week, its biggest weekly inflow since it was created in late 2003,” reports Alexandra Scaggs for Bloomberg.
Further cementing the argument for inflation awakening from a long slumber is this fact: “The difference between yields on two-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, climbed to 1.52 percentage points Monday. It was the highest level since August,” reports Wes Goodman for Bloomberg.
Even with the soaring spread between two-year notes and TIPS and the recent influx of cash to TIP, it could take some time for more investors to buy into the notion of rising inflation. Prior to last week’s inflows, TIP had lost $66 million in assets this year. That after investors pulled $512 million from the fund last year and nearly $8 billion in 2013. [Post-Rate Hike ETF Ideas]
If the yield curve steepens, every fixed-income asset will see higher rates but longer dated bonds will see yields rise the most, suggesting that the economy is quickly heating up. That would make ETFs like TIP more attractive to fixed income investors.
Last year’s 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.
There are other signs those betting on a rise in TIPS and TIP are on the right track. For example, the United States Oil Fund (NYSEArca: USO) is up more than 21% over the past month. Last week, investors pulled a combined $400 million from the SPDR S&P Retail ETF (NYSEArca: XRT) and the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), two ETFs that would be vulnerable to consumer retrenchment if prices spike.
iShares TIPS ETF
ETF Trends editorial team contributed to this article.