Plenty of fixed income exchange traded funds have been spending ample time in the limelight, but with inflation subdued in the eyes of some, the same praise has not been given to Treasury Inflation Protected Securities (TIPS) ETFs, including the iShares TIPS Bond ETF (NYSEArca: TIP), making TIPS a contrarian idea.
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.
Some investors are actually bullish on TIPS at the moment.
“We have upgraded our view of TIPS to favorable as breakeven inflation rates have fallen to extremely low levels. At current valuations, we believe that TIPS offer an affordable hedge against unexpected inflation with minimal downside risk. While we are not expecting a near-term increase in inflation, the Consumer Price Index (CPI) may rise in future months as the impact from a decline in energy prices begins to dissipate over time,” said the Wells Fargo Investment Institute in a note posted by Amey Stone of Barron’s.
If the Fed raises rates too quickly, 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.
Enthusiasm for TIPS remains tepid. Barron’s highlighted “Thursday’s 10-year TIPS auction was surprisingly weak, showing just how little interest investors have in these securities right now. Thomas Simons of Jefferies called it, ‘a pretty ugly auction.’”
iShares TIPS Bond ETF
