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U.S. consumer price inflation hit the brake suddenly after improving for quite some time. Consumer prices in the U.S. rose 2.4% year over year in March 2017, below last month’s reading of a 2.7% rise as well as market expectations of a 2.6% increase. Hurt by a decline in energy prices and services cost, the country witnessed the lowest inflation rate this year. On an annual basis, energy prices increased 10.9% in March but came in lower than 15.2% in February.
Annual core inflation, which does not consider food and energy, declined to 2% from 2.2% in the prior month. It is the lowest core inflation since November 2015 that also fell shy of market expectations of 2.3%.
On a monthly basis, consumer prices dropped 0.3%, marking the first plunge in 13 months. A 3.2% sequential plunge in the energy index led to this slump. A fall in the index for wireless telephone services also restricted the overall reading.
Dark Days for TIPS ETFs?
TIPS offers robust real returns during inflationary periods, unlike its unprotected peers in the fixed-income world. These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater.
However, amid lackluster inflation, “the one-year, five-year and 10-year so-called “break-even” rates — the inflation compensation implied by inflation-protected Treasuries — dipped to their lowest levels for 2017”.
It seems that the Trump-induced inflationary expectations are easing now. The timeline for his tax reforms (which promised solid tax cuts), now seems far away mainly thanks to the administration’s inability to push through healthcare reforms. iShares TIPS Bond TIPlost 0.23% on April 17, reflecting the recent release of inflation data.
Are There Any Better Bond ETF Plays?
With Trump-backed factors seemingly taking a backseat, the U.S. bond market will likely be ruled by the Fed and geopolitics (which in turn triggers safe haven trade). The Fed is on a policy tightening mode.
Notably, expectations of a hike in interest rates by the Fed in June have fallen 10 bps from a week ago to about 50%, as per Financial Times. Several analysts have even reduced predictions for the year-end benchmark 10-year yields, as per Bloomberg. In such a situation, investors may try investing in some other form of bond ETFs (read: What Bond ETF Inflows are Saying About Fixed Income Trade).
Muni Bond ETFs
Municipal bonds are excellent choices for investors seeking a steady stream of tax free income. Usually, the interest income from munis is exempt from federal tax and may also not be taxable per state laws, making it especially attractive to investors in the high tax bracket looking to reduce their tax liability (read: Forget Trump Fear: Tap Muni Bond ETFs Ahead of Tax Day).
Apart from investors’ desire for a tax-shelter, improving fiscal health of many municipal bond issuers and an edgy sentiment prevailing in the market on geopolitical concerns make a rewarding combination. Munis are comparatively more stable than equity or high-yield bonds and yield better than Treasuries (read: Time to Buy Muni Bond ETFs?).
VanEck Vectors AMT-Free Long Municipal Index ETF (MLN - Free Report) –3.07% Yield
PowerShares National AMT-Free Municipal Bond Portfolio ETF(PZA - Free Report) –3.06% Yield
U.S. Corporate Bond ETFs
Yield hungry investors intending to restrict their plays within U.S. boundaries but not trying to expose themselves to stock market uncertainties, may find investment grade corporate bonds compelling.
The investment grade U.S. corporate bond market has been on a decent path lately as these normally yield more than their Treasury cousins, with only a little rise in risk (see all investment grade corporate bond ETFs here).
Plus, edgy investors need to be aware of default risks and should bet on investment-grade corporate bond ETFs. Here are the choices:
SPDR Barclays Capital Long Term Corporate Bond ETF –4.21% Yield
EM bond ETFs have been on a tear lately, thanks to the high-yield nature and diminishing volatility in these markets. Emerging market companies and governments sold $178.5 billion of dollar-denominated debt in Q1, marking the highest quarterly amount ever.
Image: Bigstock
Forget TIPs, Buy These Bond ETFs Instead
U.S. consumer price inflation hit the brake suddenly after improving for quite some time. Consumer prices in the U.S. rose 2.4% year over year in March 2017, below last month’s reading of a 2.7% rise as well as market expectations of a 2.6% increase. Hurt by a decline in energy prices and services cost, the country witnessed the lowest inflation rate this year. On an annual basis, energy prices increased 10.9% in March but came in lower than 15.2% in February.
Annual core inflation, which does not consider food and energy, declined to 2% from 2.2% in the prior month. It is the lowest core inflation since November 2015 that also fell shy of market expectations of 2.3%.
On a monthly basis, consumer prices dropped 0.3%, marking the first plunge in 13 months. A 3.2% sequential plunge in the energy index led to this slump. A fall in the index for wireless telephone services also restricted the overall reading.
Dark Days for TIPS ETFs?
TIPS offers robust real returns during inflationary periods, unlike its unprotected peers in the fixed-income world. These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater.
However, amid lackluster inflation, “the one-year, five-year and 10-year so-called “break-even” rates — the inflation compensation implied by inflation-protected Treasuries — dipped to their lowest levels for 2017”.
It seems that the Trump-induced inflationary expectations are easing now. The timeline for his tax reforms (which promised solid tax cuts), now seems far away mainly thanks to the administration’s inability to push through healthcare reforms. iShares TIPS Bond TIP lost 0.23% on April 17, reflecting the recent release of inflation data.
Are There Any Better Bond ETF Plays?
With Trump-backed factors seemingly taking a backseat, the U.S. bond market will likely be ruled by the Fed and geopolitics (which in turn triggers safe haven trade). The Fed is on a policy tightening mode.
Notably, expectations of a hike in interest rates by the Fed in June have fallen 10 bps from a week ago to about 50%, as per Financial Times. Several analysts have even reduced predictions for the year-end benchmark 10-year yields, as per Bloomberg. In such a situation, investors may try investing in some other form of bond ETFs (read: What Bond ETF Inflows are Saying About Fixed Income Trade).
Muni Bond ETFs
Municipal bonds are excellent choices for investors seeking a steady stream of tax free income. Usually, the interest income from munis is exempt from federal tax and may also not be taxable per state laws, making it especially attractive to investors in the high tax bracket looking to reduce their tax liability (read: Forget Trump Fear: Tap Muni Bond ETFs Ahead of Tax Day).
Apart from investors’ desire for a tax-shelter, improving fiscal health of many municipal bond issuers and an edgy sentiment prevailing in the market on geopolitical concerns make a rewarding combination. Munis are comparatively more stable than equity or high-yield bonds and yield better than Treasuries (read: Time to Buy Muni Bond ETFs?).
VanEck Vectors AMT-Free Long Municipal Index ETF (MLN - Free Report) –3.07% Yield
PowerShares National AMT-Free Municipal Bond Portfolio ETF(PZA - Free Report) –3.06% Yield
U.S. Corporate Bond ETFs
Yield hungry investors intending to restrict their plays within U.S. boundaries but not trying to expose themselves to stock market uncertainties, may find investment grade corporate bonds compelling.
The investment grade U.S. corporate bond market has been on a decent path lately as these normally yield more than their Treasury cousins, with only a little rise in risk (see all investment grade corporate bond ETFs here).
Plus, edgy investors need to be aware of default risks and should bet on investment-grade corporate bond ETFs. Here are the choices:
SPDR Barclays Capital Long Term Corporate Bond ETF –4.21% Yield
ProShares Investment Grade—Interest Rate Hedged ETF (IGHG - Free Report) –3.35% Yield
Emerging Market bond ETFs
EM bond ETFs have been on a tear lately, thanks to the high-yield nature and diminishing volatility in these markets. Emerging market companies and governments sold $178.5 billion of dollar-denominated debt in Q1, marking the highest quarterly amount ever.
iShares JPMorgan USD Emerging Markets Bond ETF (EMB - Free Report) –4.70% Yield
ProShares Short Term USD Emerging Markets Bond – 4.63% Yield
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