With all the money printing from the Fed and gold approaching historic levels, it is clear that many investors are growing increasingly worried about the prospect of inflation striking their portfolios in the near term. Since the economy still remains incredibly weak, more quantitative easing cannot be ruled out at this month’s FOMC meeting, increasing the possibility of price increases across the board. Add in the turmoil currently rocking European markets and it is easy to see why today’s CPI report in the U.S. could have a huge impact on a number of sectors for the near term.
After last month’s 0.5% uptick in month-over-month terms, investors are expecting price increases to cool a little bit for the most recent month, coming in at a 0.2% change. Meanwhile, in the core CPI, less food and energy, the consensus calls for another month of a 0.2% change.
If investors see another sharp rise like the one experienced last month in the broad reading, it could once again spark fears over inflation and force the central bank to hold off on more easing measures for the time being. If, however, investors see that July’s figure was just an aberration, it could give the central bank more options going forward and ease concerns over rapid price increases [see all the ETFs in the Inflation-Protected Bonds ETFdb Category].
Thanks to this key report, investors should look for the Barclays TIPS Bond Fund (TIP) from iShares to remain in focus throughout today’s trading. The product tracks the Barclays Capital U.S. Treasury Inflation Protected Securities Index which includes all publicly issued, U.S. Treasury inflation-protected securities that have at least one year remaining to maturity, are rated investment grade, and have $250 million or more of outstanding face value. TIP has a heavy focus on shorter duration securities as close to two-thirds of its portfolio matures in less than 10 years. However, the product also does offer some exposure to the longer end of the curve as well, giving the fund an average maturity of roughly 9.4 years, putting it in the middle of the maturity curve [see more on TIP's Fact Sheet].
Over the past few months, it has been a great time to be an investor in TIP from a capital appreciation perspective, as the product has gained just under 5% in the past quarter and nearly 7.5% so far in 2011. With that being said, the demand for TIPS has pushed the yield down on the product to fresh lows that would probably shock an income-oriented investor. In fact, according to the 30-Day SEC yield, the fund actually has a negative yield, ‘paying out’ -.3% to investors. In other words, the yield isn’t even enough to compensate investors for the fund’s meager expense ratio.
Thanks to this, any deviation from the consensus estimate on CPI could have a large impact on TIP later today. If investors expect more inflation in the months ahead we could see the yield on TIP decline even further, helping to push asset prices higher in the near term. If, however, inflation looks to remain in check, we could see TIP reverse its recent strength as investors flee the securities for higher yielding, but riskier, assets [see more charts of TIP here].
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Disclosure: No positions at time of writing.