By many accounts, official inflation remains muted, but that ignores an array of price increases across everyday categories and it also ignores the fact there ample signs inflation is rising, putting a spotlight on exchange traded funds such as the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (NYSEArca: TDTT).
Treasury Inflation-Protected Securities (TIPS) are popular among fixed-income investors looking to protect against the scourge of inflation and ETFs make it easier to access TIPS. The Federal Reserve paints a compelling picture for those considering TDTT. So do rising prices across a variety of marquee consumer categories.
“The gap between everyday experience and the yearly inflation rate of 1.3% in August is massive. The price of the stuff we’re buying is rising much faster, while the stuff we’re no longer buying has been falling, but still counts for the figures,” reports James Mackintosh for Dow Jones.
TDTT Time Is Now
Investors will typically look at TIPS ahead of an inflationary period since buying TIPS after inflation has gone up means that the security has already priced in the inflation and investors would likely be overpaying for the TIPS exposure. TDTT has 20 holdings and a weighted average maturity of 3.92 years. Data suggest the coronavirus pandemic is actually contributing to inflation.
“In vogue: sitting at home in your pajamas (men’s nightwear is up 4%), cycling (bikes up 6%), reading for pleasure (books up 4%, newspapers up 5%) and making things (sewing machines and fabric up 9%, cameras up 4%). Medical care is in demand (up 5%), while higher education is much less attractive (tuition fees up 1.3%, the lowest since data started in the late 1970s),” according to Dow Jones.
While inflation expectations may remain muted now, investors are already looking into TIPS as a hedge against rising prices ahead. TIPS returns are affected by interest-rate risk as well as changes in the principal value when the Consumer Price Index moves. TIPS will adjust their principal value upward in response to a higher CPI, but the reverse occurs during periods of deflation.
“Big money rests on what will happen next, because the Federal Reserve has committed not to raise rates until PCE inflation hits 2%. Treasurys, stocks and the dollar all depend on whether the Fed will start increasing rates earlier than the current expectation of, give or take, never,” according to Dow Jones.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.