Investors are betting the Federal Reserve will achieve its price-stability goals, with demand for exchange-traded funds that invest in longer-term inflation- protected U.S. debt at a record low compared with similar funds that buy shorter-maturity securities.
The shares outstanding in iShares TIPS Bond ETF, a fund with more than 53 percent of its assets in long-term inflation- linked products, exceeded those of the FlexShares iBoxx Three- Year Target Duration TIPS Index ETF by 23,946 on Sept. 10, the lowest on record, according to data compiled by Bloomberg. Overall inflows to ETFs tracking U.S. inflation have totaled $618 million this year, the weakest pace of increase of any fixed-income asset class tracked by Bloomberg.
The consumer price index is forecast to show no change in August from July, while inflation as measured by the central bank’s preferred gauge has risen less than the 2 percent target for 27 straight months. Fed Chair Janet Yellen will convene a two-day meeting starting tomorrow with policy makers projected to debate when to start raising interest rate next year to maintain price stability as economic growth accelerates.
“There is no evidence at this point that an investor’s portfolio needs inflation insurance by most measures,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “With lower commodity prices and low wages the TIPS market will have problems performing as long as the market perceives inflation to be well anchored.”
While more than $3 trillion of debt purchases since 2008 have helped the U.S. recover from its worst recession in seven decades, bond-market indicators for long-term inflation, growth and funding costs are all lower now than they were at the end of the central bank’s first two rounds of quantitative easing.
Boston Fed President Eric Rosengren said last week that it’s time to consider dropping a pledge to keep rates low for a “considerable time” after the completion of the central bank’s bond-purchase program.
U.S. economic growth projections have been trimmed to 2.1 percent in 2014, compared with 2.8 percent in January. The difference in yields on 10-year notes and inflation-protected debt, known as the break-even rate, shows investors anticipate living expenses to increase an average 2.13 percent during the next 10 years, lower the average of 2.2 percent during the past five years.
The Fed’s preferred gauge of inflation, known as the personal consumption expenditures deflator, has been below the central bank’s 2 percent goal since April 2012. Commodities fell to the lowest level in more than five years today, with the Bloomberg Commodity Index of 22 futures dropped to the lowest since July 2009.
“Yellen sees any upticks in inflation as noise, and she’s turned out right as long term inflation expectations have been coming down pretty rapidly,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of 22 primary dealers that trade directly with the Fed., said. “With the Fed expected to raise rates at some point longer term inflation expectations are expected to continue to wane.”
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