U.S. core inflation ticked higher in October and could hit the 2% level early next year, potentially making Treasury Inflation Protected Securities, or TIPS, and the corresponding ETFs fixed income ideas to consider in 2018.
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.
ETF investors can gain exposure to Treasury inflation protected securities through a number of options, including the iShares TIPS Bond ETF (NYSEArca: TIP), Schwab U.S. TIPS (NYSEArca: SCHP) and SPDR Barclays TIPS ETF (NYSEArca: IPE).
Rising core inflation “indicates that the Federal Reserve (Fed) remains on track to lift interest rates in the months ahead. We see scope for monetary policy divergence to feed a further moderate rise in the U.S. dollar in coming months as U.S. yields climb relative to eurozone counterparts,” according to a recent BlackRock note.
TIPS are a type of Treasury security that is indexed to inflation as a way to shield investors from the negative effects of inflation. The securities’ par value rises with inflation as measured by the Consumer Price Index while interest rate remains fixed. TIPS also offer investors another layer of diversification as many aggregate bond funds exclude TIPS from their holdings.
“We expect some of the major one-off drops—especially the sharp fall in wireless telephone costs due to changes in major pricing plans—to wash out of the data in coming months and lift the annual rate of core inflation to the Fed’s 2% target, although base effects will keep the data noisy,” said BlackRock. “Wednesday’s October CPI report, showing a 0.2% monthly increase in core prices, reinforces this view.”
“This CPI release was the last before the Fed’s December meeting at which it is expected to raise interest rates for the fifth time in this cycle to 1.25%–1.5%. We see scope for the Fed to raise rates a few more times in 2018,” according to BlackRock.
For more information on Treasury inflation protected securities, visit our TIPS category.
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.