U.S. inflation level may be subdued, but several analysts are bullish on the prospect of higher inflation in the medium term. Vanguard and BlackRock expect to see inflation returning to 2% irrespective of what happens in Washington.
Firming up of the job market will lift wages, encouraging Americans to shell out more and boost consumer prices. U.S. employers added 209,000 new jobs in July, breezing past expectations of 183,000. Wage growth picked up 2.5% year over year in July against expectations of a decline to 2.4%. This indicates an upbeat job market. Plus, the greenback is subdued this year, giving a boost to inflation (read: If Dollar Remains Weak, Bet on These ETFs & Stocks).
Two Fed rate hikes so far couldn’t lift bond yields meaningfully. The yield on 10-year benchmark U.S. Treasury bond was 2.24% on August 8. Meanwhile, the Fed indicated that it plans to start normalization of its $4.5-trillion balance sheet “relatively soon”.
Several analysts are of the view that the Fed won’t pursue two tightening measures at a time and thus there is a chance that the Fed may delay a hike in interest rates until at least March 2018 (read: Top ETF Stories of July 2017).
Inside Analysts’ View
Vanguard estimates 10-year break-even levels in the range of 2—2.25%. BlackRock also believes that “TIPS are incredibly cheap.” Notably, TIPS offer 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. As a result, both principal amount and interest payments will keep on rising with increasing consumer prices.
Pimco too finds TIPS undervalued but at the same time expects inflation to run below 2% until next year. Strategists at Goldman Sachs believe that some of the factors that have kept inflation expectations lower will soon fade away.
We also believe that subdued energy prices have been a key cause of low inflation. And if energy prices rebound for some reasons, inflation may see a quick uptick.
TIPS Assets Gain
After U.S. inflation-linked bond funds went through redemptions in May, they saw inflows of $1.2 billion in June and July, according to EPFR Global. This is the first time since January that inflows have grown sequentially.
TIPS ETFs in Focus
Investors with a long-term view can count on the potential uptick in inflation as U.S. economic backdrop remains robust and things in the energy space should improve sooner or later. With the economy and the job market on the mend, inflation will definitely increase in the coming months (see: all TIPS ETFs here):
So, investors can keep a tab on the likes of iShares TIPS Bond ETF (TIP - Free Report) , Vanguard Short-Term Inflation-Protected Securities ETF (VTIP - Free Report) , Schwab U.S. TIPS ETF (SCHP - Free Report) , FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT - Free Report) and iShares 0-5 Year TIPS Bond ETF (STIP - Free Report) .
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