Investors are Loving Fixed Income ETFs as Yield Curve Steepens

Fixed income exchange traded funds were scorching hot in the first quarter and most of investors’ adulation for bond funds was focused on ETFs holding U.S. government debt. That affection has been intensifying for ETFs holding Treasury inflation protection securities (TIPS).

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. The iShares TIPS Bond ETF (NYSEArca: TIP) is a popular avenue for investors looking for TIPS exposure.

Part of the reasons advisors and investors are embracing TIPS and the relevant ETFs are bets that markets are not pricing in high enough inflation.