Treasury inflation-protected securities and related ETFs have seen increased interest as the Federal Reserves hints at looser monetary policies ahead.
So far this month, the iShares TIPS Bond ETF (NYSEArca: TIP) attracted $391 million in net inflows and the Vanguard Short-Term Inflation-Protected Securities ETF (NYSEArca: VTIP) saw $88 million in inflows, according to ETFdb data.
Meanwhile, yield on TIPS, which exhibit an inverse relationship to bond prices, have declined along with the fixed-rate U.S. government debt to near their lowest level in almost two years, the Wall Street Journal reports. The yield on 10-year TIPS dipped to a recent 0.35% Thursday from about 1.20% in November, when the 10-year yield broke to multi-year highs above 3%.
Investors previously expected the Fed to hike rates in 2019, but now, the markets are anticipating multiple rate cuts ahead to counteract the damaging effects of a prolonged trade war between the U.S. and China.
Consequently, TIPS are gaining momentum in anticipation of the looser monetary policy ahead since rate cuts tend to fuel growth and inflation.
“The market is saying the Fed has less control over inflation than general economic activity does,” Tom Graff, a bond manager at Brown Advisory, told the WSJ. The decline in TIPS yields is part of a broad set of signals that “point to the fragility of growth.”
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.
The strength in the TIPS market also comes despite weak inflation data. Fed officials recently lowered their inflation outlook for June, and many now predict the price index for personal-consumption expenditures will rise 1.5% this year, or below the central banks 2% target until 2021.
For more information on Treasury inflation protected securities, visit our TIPS category.
