Global food prices are on the move higher, underscoring inflationary pressures that are ongoing in today’s market environment, but bond investors can protect themselves with the right ETF in place.
“Global food prices have hit the highest level in over a decade after rising by more than 30% in the last year, the United Nations Food and Agriculture Organization (FAO) says,” a BBC News report says. “The agency’s figures highlighted the soaring cost of cereals and vegetable oils around the world.”
The U.S. Federal Reserve recently announced that it would start to taper off its bond purchases after noting a strong, recovering economy. Of course, that means the central bank would mark 2022 as the year to start raising interest rates again, which does no favors for bond investors who locked in rates this year or prior.
“It’s a dangerous game when financial conditions are this loose, the economy is doing this well and inflationary pressures are this high, to be running monetary policy for a crisis-like environment,” according to Troy Gayeski, chief market strategist for FS Investments, who advises in a Reuters article that investors look at inflation protection products and avoid long-duration bonds. “But it could be setting us up for a really tough 2022.”
Shorter Duration Plus Inflation Protection
Minimizing interest rate risk is possible by investing in shorter-duration debt. At the same time, Treasury-inflation protected securities (TIPS) can also offer protection, and ETF investors can get both with the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT).
TDTT seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the iBoxx 3-Year Target Duration TIPS Index. The underlying index reflects the performance of a selection of TIPS with a targeted average modified adjusted duration, as defined by the index provider, of approximately three years.
“TDTT can be useful as a tool for protecting portfolios against anticipated upticks in inflationary pressures,” an ETF Database analysis explains. “TDTT could be used, in moderate amounts, by buy-and-hold investors, or as a tactical play for those looking to shift into low-risk assets that may hold up well in inflationary environments.”
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