- Fixed-income investors are easing into Treasury inflation protected securities and bond-related ETFs
- Investors are shifting into TIPS assets as U.S. core PCE inflation rose 1.7% year-over-year in January
- With deflationary concerns at all time highs, contrarian investors may be turning to TIPS to get a head start on rising inflation
After deflation fears hit record highs, fixed-income investors are easing into Treasury inflation protected securities and bond-related exchange traded funds.
The higher U.S. core inflation and rise in oil prices are drawing more investors into TIPS. For instance, the iShares TIPS Bond ETF (NYSEArca: TIP), which tracks a group of U.S. TIPS from the Barclays U.S. Treasury Inflation Protected Securities Index (Series-L), has attracted almost $1.4 billion in net inflows so far this year, according to ETF.com.
Investors are shifting into TIPS assets as U.S. core PCE inflation rose 1.7% year-over-year in January, reports Luke Kawa for Bloomberg.
The New York Fed’s survey of consumers found expectations for inflation one year in the futures increased to 2.71% in February from 2.42% in January, Reuters reports.
After briefly falling out of favor in early 2016 as inflationary fears failed to pan out, with some like Goldman Sachs abandoning their call on inflation-linked sovereign debt, sentiment is shifting on rising oil prices, which have surged almost 50% off their recent lows.
“In a context where deflation fears were too strong and are now gradually normalizing, these inflows into inflation-protected bond funds clearly make sense, both in the U.S. and in Europe,” Alain Bokobza, Société Générale SA head of global asset allocation, said in a note.
The bank also noted that global deflationary fears, as implied by SocGen’s newsflow indicator, had recently hit all time highs. Bokobza argued that deflation fears were at an “extreme level,” Bloomberg reported.
With deflationary concerns at all time highs, contrarian investors may be turning to TIPS to get a head start on rising inflation around the corner.
Treasury inflation-protected securities, or TIPS, are a type of Treasury security that is indexed to inflation as a way to shield investors from the negative effects of inflation. The securities’ par value rises with inflation as measured by the Consumer Price Index while interest rate remains fixed. Investors would typically acquire TIPS ahead of rising inflation to capitalize on the debt securities adjustments in a rising CPI. TIPS also offer investors another layer of diversification as many aggregate bond funds exclude TIPS from their holdings.
iShares TIPS Bond ETF