May 27, 2021
The market was in a frenzy over the latest CPI report which had the highest rise in inflation since 2008. While tech stocks plunged and gold surged, massive money moved into another asset, Treasury Inflation-Protected Securities (TIPS). According to Deutschland bank, this is the heaviest inflow into the TIPS market since 2010, and there are reasons behind that. Since 1998, stocks and bond prices have had a negative correlation, which gave investors reprieve if the stock market wasn’t performing well, but that hedge is disappearing. Recently, stocks and bonds have moved up and down together, and this typically happens when inflation risk is at its peak. This is causing investors to pick TIPS hoping to replicate a hedge against inflation and stock gyrations. Other sectors that normally perform well against inflation such as energy and commodities have also seen outflows.
FINSUM + Magnifi: Investors for the last decade have turned to lots of different inflation hedges but Occam’s razor says TIPS are the answer. Exploit bond market counter-cyclical protection but protect yourself from inflation risk.
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