Investors who flocked to bonds offering protection against inflation are now dumping them in a bet that the Federal Reserve will be successful in quashing rising prices. Treasury Inflation Protected Securities (TIPS) have seen outflows for five straight weeks, the longest streak since April 2020, according to Bank of America chief investment strategist Michael Hartnett, who wrote in a note that investors are “allowing inflation to dwindle.” . TIPS are government bonds indexed to inflation to protect investors from falling purchasing power. The capital value of TIPS increases as inflation rises. The securities met with huge demand as investors hedged against inflation, which had hit a 40-year high in mid-2022. The record selling came as investors welcomed two encouraging inflation reports this week that showed some progress in battling rising prices. US consumer prices rose 8.5% yoy in July, slower than June and lighter than expected. Wholesale prices also fell last month, the first drop in two years. “The fall in inflation that peaked a few months ago is now showing up in headline data in a meaningful way,” said Jamie Cox, managing partner of Harris Financial Group. “The Fed now has enough cover to reduce the pace and magnitude of future rate hikes. This is really good news and reduces the likelihood of stagflation and the need for a major recession to break the backbone of embedded inflation.” The largest exchange-traded fund that tracks TIPS – the iShares TIPS Bond ETF – is this year in the face of tightening efforts Federal Reserve fell by more than 10%. The central bank has aggressively raised interest rates and rolled back its massive bond-buying program, shrinking its balance sheet and driving up real yields. Wall Street has been watching the TIPS market closely as a decline in value could also indicate an improvement in the inflation outlook and that the Fed is doing its job of fighting price pressures. “The market seems to take solace in the fact that we appear to have peaked inflation and we should continue to see declines in the second half of the year,” said Brian Price, head of investment management at the Commonwealth Financial Network. “If energy prices continue to fall then I expect we will see inflation data in the coming months.”
