Funds that hold inflation-protected bonds benefit from their longest series of entries in more than a decade, as investors guarantee consumer prices rise as the US economy recovers.
According to data provider EPFR, an additional $ 1.2 billion was invested in funds that buy inflation-protected US Treasury securities, or Tips, during the week ended Wednesday, according to data provider EPFR. – the 29th consecutive week of net admissions. That brought the total for the year to date to $ 14.4 billion.
“Inflation is the number one concern,” said Collin Martin, fixed income strategist at Charles Schwab. “[Tips] won’t offer you much return or return potential, but if you’re worried about a surprise with inflation rising significantly, there really isn’t a better investment that can serve as a hedge. “
Markets have been intensely focused on the inflation outlook since the first signs in November that the global coronavirus vaccination campaign is progressing faster than expected.
The Biden administration’s $ 1.9 billion fiscal stimulus package, adopted in March, new predictions fueled higher prices to come, with top economists including former Treasury Secretary Larry Summers Warning on the risks of overheating the world’s largest economy.
The Federal Reserve’s preferred inflation indicator – Core PCE – was 1.4% in February, and policymakers pledged to keep monetary policy ultra-accommodative until it averages 2%.
Fed Chairman Jay Powell and other central bank officials have argued that any increase in price pressure would “transientAnd will likely fade away as supply chains adjust to growing demand.
Popular market metrics of inflation expectations indicate that Wall Street broadly agrees with this view. The two-year and five-year break-even rates, which are derived from Tips and predict inflation in two and five years, now hover at 2.63% and 2.57%, respectively, after both being lower at 2% in December. The 10-year gauge is lower, however, at 2.3 percent.
As equilibrium rates have risen, longer-term Treasuries have sold off, as the value of these bonds is eroded by inflation. That took the 10-year Treasury yield from less than 1% at the start of the year to a high of 1.78%. It is now at 1.55%.
Investment strategists expect strong economic growth and inflation to push it even higher: Bloomberg forecasts point to a year-end return of 2%.
“Transient [inflation] can move markets, ”said Alexandra Lawson, fixed income portfolio manager at Goldman Sachs Asset Management. “That in itself can lead to higher inflation expectations.”
She added: “If you think inflation expectations lead to more permanent inflation, you can help offset that in exposure to tips.”