Inflation hasn’t been as transitory as the Federal Reserve predicted in late 2021, and as 2022 continues to wear on, investors should be advised to take the necessary steps to preserve their fixed income portfolios.
The latest personal income and outlays report showed that the personal consumption expenditures index increased in February, marking a 5.4% jump compared to a year ago. This is the biggest increase since April of 1983, according to a CNBC report.
In turn, the latest increase meant that consumers were less willing to spend despite wage inflation rising in tow.
“Surging prices dented consumer spending, which rose just 0.2% for the month, below the 0.5% estimate,” the CNBC article says. “Disposable personal income increased 0.4%, a touch below the 0.5% expectation, while real disposable income fell 0.2%. Savings nudged higher to $1.15 trillion, or a rate of 6.3%.”
Inflation Protection in the Short Term
One way to hedge inflation is to try to stay in lockstep with it by using Treasury inflation-protected securities (TIPS). Investors can get this level of exposure using the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP).
VTIP seeks to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index performance. The index is a market capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than five years.
The manager attempts to replicate the target index by investing all, or substantially all, of its assets in the securities that make up the index, holding each security in approximately the same proportion as its weighting in the index.
- Seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years.
- Designed to generate returns more closely correlated with realized inflation over the near term and offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund.
- Given its shorter duration, the fund can have less real interest rate risk and lower total returns relative to a longer-duration TIPS fund.
- Invests in bonds backed by the full faith and credit of the federal government and whose principals are adjusted semi-annually based on inflation.
- Can provide protection from inflationary surprises or ”unexpected inflation.”
For more news, information, and strategy, visit the Fixed Income Channel.