Demand for Treasury inflation-protected securities has been fiercely strong this year considering the accommodative monetary policy stance of virtually all major central banks. This is because the current macro environment faces little to no threat of rising prices.
TIPS funds spanning all regions of the globe have been enjoying a stellar rally YTD in the face of little to no inflation and negative interest rates.
TIPS ETFs Keep Running Higher
Just how strong is the appetite for inflation-fighting Treasuries?
Consider the table below which highlights the five TIPS ETFs with the biggest inflows YTD (1/1 – 4/12/16) along with their respective returns in the same time frame:
| Ticker | Name | Net Flows (in millions) | YTD Returns |
|---|---|---|---|
| (LTPZ ) | PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund | $18.71 | 8.3% |
| (WIP ) | SPDR Citi International Government Inflation-Protected Bond ETF | $34.13 | 7.9% |
| (IPE ) | SPDR Barclays Capital TIPS ETF | $11.14 | 4.2% |
| (TIP ) | iShares TIPS Bond ETF | $2,175.13 | 4.0% |
| (SCHP ) | Schwab U.S. TIPS ETF | $158.80 | 4.0% |
Key takeaways:
- Demand for TIPS is strong as evidenced by multibillion dollar flows to this group YTD.
- Despite posting the best returns in this group, LTPZ has raked in among the paltriest of sums.
As further testament to the sheer demand of TIPS, recent research from Bank of America Merrill Lynch shows that investors have been net buyers of TIPS funds for seven straight weeks, the longest run in almost a year.
TIPS ETF Chart Review
Let’s consider a technical review of the biggest contender from the above group; below is a five-year weekly returns chart for (TIP ):
Key takeaways:
- Over the long-term, TIP appears to have successfully broken above a stiff resistance line (red) that has persisted since the end of 2012.
- Over the short-term, TIP has staged an impressive breakout above a steeply sloping resistance line (blue) that has persisted over the past year.
Purely from a trend-following perspective, this ETF, and perhaps the TIPS asset class as a whole, has staged a noteworthy rally; the persistent momentum is not only impressive in the scope of this year, but it also translates into a meaningful trend reversal from a five-year horizon as well.
No Signs of Inflation Picking up Yet
On the commodities front, food and energy prices remain low, which is keeping a lid on CPI metrics. In Europe and Japan, central banks are flirting with negative rates and their economies show little to no prospects of healthy inflation. At home, the Fed remains dovish, citing that while inflation has picked up in recent months, it continues to trend below the 2% target.
All in all, judging by the fundamental factors in place, deflation seems just as likely of a threat as inflation spiraling above the 2% threshold without warning.
Ways to Play
Investors have a variety of options when it comes to accessing Treasury inflation-protected securities via the ETF wrapper. Some highlights include:
- The Biggest: Over $17 billion AUM, iShares TIPS Bond ETF (TIP ).
- Best Five-Year Performer: 31.4%, PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (LTPZ ).
- Highest Yielding: 0.82%, Vanguard Short-Term Inflation-Protected Securities ETF (VTIP ).
- A+ Rated: SPDR Citi International Government Inflation-Protected Bond ETF (WIP ).
See all TIPS ETFs here.
The Bottom Line
Inflation or no inflation, TIPS have managed to attract a steady stream of buyers this year in the face of a fragile macro environment. Only time will tell whether or not positive TIPS returns will persist in the face of absent inflation. As in the case of all divergences, something has to give; and in this case, it seems that something may either be TIPS falling back in line with realistic inflation expectations, or an actual pickup in prices that catches other assets off guard.
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