Ahead of the tomorrow’s conclusion of the Federal Reserve’s September meeting, plenty of fixed income exchange traded funds have been spending ample time in the limelight. Investors should be careful of affording such attention to Treasury Inflation Protected Securities (TIPS) ETFs, including the iShares TIPS Bond ETF (NYSEArca: TIP).
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.
However, expectations of rising U.S. inflation continue to dwindle with recent data from the Fed suggesting inflation expectations are at multi-year lows.
“Consumer expectations for inflation three years ahead fell last month to the lowest level in records going back to June 2013, according to a Federal Reserve Bank of New York survey released Monday.
The median respondent to the New York Fed’s August Survey of Consumer Expectations predicted annual consumer price inflation three years hence would be 2.9 percent, down from 3 percent the month before. Median expected inflation a year ahead fell to 2.8 percent from 3 percent, marking the second-lowest response in the history of the survey,” reports Matthew Boesler for Bloomberg.
The low-inflation environment is also fueling bets that the Fed could push off any interest rate hikes.
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]
The Fed 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.
iShares TIPS Bond ETF
