Nearly $ 50 billion is pouring into US inflation-linked bond funds. Why more could be on the way.

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Investors aren’t just worried about the rising cost of living. They have also invested some $ 46 billion in inflation-linked bond funds over the past 15 months, with the aim of protecting their wealth from rising prices.

Two weeks ago, a $ 3.2 billion inflow of funds poured into US inflation-indexed funds “by far the largest one-week inflow on record for the asset class,” reported writes Goldman Sachs analysts in a weekly report.

This week another billion dollars was pumped into the sector. “The recent large inflows follow an unprecedented race for inflation-linked bond funds since April 15 of last year,” the Goldman team wrote.

More capital inflows could also be considered, as investors fear inflation may persist longer than the Federal Reserve – and the markets – expected.

“This is dramatic,” said Chip Hughey, managing director of fixed income at Truist Advisory Services, of the influx of funds linked to inflation. “If you look at a portfolio in a specific fixed income context, you have limited tools to use to protect yourself against inflation, especially if it is above what the market is positioned for. “

This chart shows the dramatic increase in assets under management of U.S. inflation-indexed bond funds since the spring of 2020, or the first phase of the pandemic when massive business closings hit the U.S. economy.

Record inflows hit U.S. inflation-linked bond funds

EPFR, Goldman Sachs Global Investment Research

The Goldman team estimated the inflows as a 60% increase in assets under management for funds since mid-April last year.

The increased flow of funds into the niche sector follows more than a decade of low inflation. As the US economy has rebounded from the first wave of pandemic devastation, so too has the interest in finding ways to protect wealth from eroding higher prices.

US inflation in June rose sharply again, registering a 4% increase over last year and reaching a 13-year high.

Hughey said the recent ‘big bang’ in inflation-linked bond funds likely signaled a shift in investor thinking that the recent frantic pace of inflation may not be as transient as many initially thought. .

Instead of two to three months, higher prices seem more likely to last six to nine months, especially with upward pressure on rents and wages, he said in a telephone interview. with MarketWatch.

“Our point is that while we certainly expect inflation to cool off from very high readings over the past few months,” said Hughey, the Truist team expects it is moving above the annual average range of 1.6% to 1.7% observed for much of the past. decade.

Fixed income investments can be particularly vulnerable to inflation as higher costs can undermine the sector’s modest returns relative to equities, especially as already low returns have plummeted globally, along with extreme support. of the world’s major central banks.

See: What the global accumulation of negative-yielding debt means for U.S. Treasuries

The 10-year Treasury yield TMUBMUSD10Y,
1.479%
rose 9 basis points on Friday to 1.3%, after a strong employment report released by the Labor Department on Friday showed the United States created 943,000 jobs last month, the biggest gain in almost a year.

The S&P 500 SPX index,
-2.27%
was on track for an 18.1% gain so far this year, through Friday, while the Dow Jones Industrial Average DJIA,
-2.53%
was up 15% for the same stretch, according to FactSet.

One way for investors to offset the risks associated with the rising cost of living may be to own inflation-indexed securities, including those offered through mutual funds and exchange-traded funds, such as iShares TIPS Bond ETF TIP,
+ 0.50%
or other VTIP tracking reference,
-0.02%

SCHP,
+ 0.52%
funds.

Earlier this week, the US Treasury announced that it would gradually increase the size of its inflation-protected securities auction, or TIPS, by $ 1 billion, from August, September and October, resulting in a gross issue expected in 2021 of 20 billion dollars.

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