U.S. Markets closed

TIPS ETFs Climb as Inflation Rises More Than Expected


Inflation-indexed bond ETFs that fell harder than nominal Treasuries during the recent interest-rate spike were getting a lift Tuesday from a report showing consumer prices rose more than expected in June.

The Consumer Price Index rose 0.5% last month, the Labor Department said.

The iShares TIPS Bond ETF (TIP) was fractionally higher at last check Tuesday. The principal of TIPS is adjusted for inflation using the CPI. However, it’s important to understand that TIPS can be hurt by rising rates just like nominal Treasuries.

TIPS ETFs have had a rough time in recent months on low inflation and rising Treasury yields. [A Toxic Mix For TIPS ETFs]

CPI rose 0.1% in May. The index fell 0.4% in April after slipping 0.2% in March.

The 0.5% rise in June was driven by higher gasoline prices.

On a year-over-year basis, the inflation rate rose to 1.8% in June. The Fed’s long-term inflation target is 2%.

“Inflation signs we’re seeing don’t point to some sort of hyperinflation, but it does suggest there are normal inflationary pressures in the economy which may be a sign of further recovery,” said Steve Cunningham, director of research and education at the American Institute for Economic Research, in a CNNMoney report. “As long as it’s well contained, there’s no fear of a bigger problem.”

The TIPS ETF is still down about 7% for the trailing three months.

The recent setback in TIPS funds is a reminder for investors who bought the ETFs for inflation protection that they can lose money when Treasury yields rise. Many investors have positioned for rising inflation due to easy monetary by the Federal Reserve and other central banks.

“When yields began to rise in May on expectations the Federal Reserve would slow its bond-buying program, inflation expectations didn’t, amplifying the losses on inflation-hedged U.S. debt,” Bloomberg News reports. “While the yield on 10-year Treasuries soared as high as 2.75%on July 8, from a low of 1.61% on May 1, yields on inflation-indexed debt climbed even faster and further. As a result, the narrowing in the difference between yields of Treasuries and TIPS, known as the break-even rate, showed that investors viewed inflation as less of a threat in the short term and thus were cutting the price they would pay for insurance against it.”

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.