Inflation Hints Drive Investors to Inflation Protected Bonds

September 2, 2014 Share Print 0

U.S. investors are back in the hunt for inflation protection for the first time in two years as rising housing costs – particularly for rent – suggest inflation may finally be waking from its post-recession slumber.

That’s helping to drive cash into specialty funds that focus on Treasury Inflation Protected Securities, or TIPS, arguably the weakest corner of the U.S. government bond market over the previous year or so, and helping TIPS significantly outperform regular Treasuries this year.

TIPS-focused funds are on pace to end seven consecutive quarters of outflows over which investors drained almost $38 billion from the sector. They’ve attracted $1.52 billion so far in the third period, marking the first quarterly inflows since the third quarter of 2012 and the largest since the first quarter of 2012.

Fund managers said the rising cost of housing – which accounts for as much as a third or more of various measures of inflation and is outpacing other consumer cost increases – has revived price pressure in the economy.

“TIPS have had a good tail wind this year. We have inflation as opposed to last year when we had disinflation,” said Gemma Wright-Casparius, who oversees Vanguard’s $26.3 billion inflation-protected securities fund, the biggest U.S. fund of its kind. The fund is up 6.5 percent this year.

via Reuters

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Alfonso Esparza

Senior Currency Analyst at Market Pulse

Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.