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TIPS ETF Down More Than Treasuries on Falling Inflation Expectations


The iShares TIPS Bond ETF (TIP) has underperformed Treasury funds with similar durations as investors ratchet down their inflation expectations.

TIP is down 3.6% year to date compared with a loss of 1.5% for iShares 7-10 Year Treasury Bond ETF (IEF). TIP has a weighted average maturity of 8.8 years, according to sponsor BlackRock.

The ETF is designed to invest in Treasury Inflation Protected Securities. Investors have pulled over $3 billion from TIP year to date. The ETF currently holds $18.5 billion.

The demand for inflation-protected bonds tends to rise when inflationary expectations are rising, and vice versa, writes Ed Yardeni at Yardeni Research.

“In the current environment, inflationary expectations are falling, and so is the demand for inflation-protected bonds, which is why the TIPS yield is rising,” Yardeni said.

He also points out that TIPS prices are highly correlated with the price of gold.

“Obviously, rising gold prices must reflect some concerns about rising inflation, which would increase the demand for TIPS. This year’s break in the gold price suggests that inflationary expectations are coming down, and so is the demand for TIPS,” Yardeni wrote.

With TIPS, the principal is linked to changes in the CPI. However, the bonds are also sensitive to interest rates just like regular Treasuries. Therefore, TIPS can lose value when Treasury yields rise. Like right now.

For TIPS ETF investors, the inflation “breakeven rate” is important to monitor. It is determined by comparing the yields of regulator government bonds against inflation-protected securities of the same durations. If inflation averages more than the breakeven rate over a given time period, then investors would be better off owning TIPS than normal Treasury bonds.

iShares TIPS Bond ETF

Full disclosure: Tom Lydon’s clients own TIP.

The opinions and forecasts expressed herein are solely those of John Spence, 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.