As more investors snub the worries stemming from the Omicron variant, inflation is coming back to the forefront, stressing the importance of tilting bond exposure towards short duration with inflation protection.

Even before the variant hit, consumer prices were already rising from a recovering economy coupled with stimulus dollars flowing freely. The Federal Reserve originally cited that rising inflation would be transitory, but the narrative is changing.

More persistent inflation would mean that the Fed would certainly raise interest rates sooner rather than later. This would come off the heels of its decision to start tapering its stimulus measures, including the reduction of its bond purchases.

That said, in order for fixed income investors to prevent inflation from eroding their income, they could shorten up duration. Additionally, Treasury inflation-protected securities (TIPS) can also help.

“We are tilting our investment portfolios toward equities and fixed income with short duration,” notes Felipe Gomez, an investment consultant at Banorte Securities International. “The key drivers behind our investment committee’s view are an expected tapering of bond purchases by the Fed and high oil prices.”

“We have been offering diversified bond funds with flexible investment policies, as well as mutual funds invested in commodities, mortgage-backed securities, inflation-linked Treasuries, and high yield bonds with sufficient spreads as alternatives to traditional bonds, fixed income funds with long duration, and constrained mutual funds,” Gomez adds further.

Short Duration and Inflation Protection in One Fund

Given the options of short duration and adding TIPS to a fixed income portfolio, investors don’t have to settle for one over the other. They can get both via 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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