Investors pour billions into inflation-linked assets

Investors are hoarding inflation-indexed assets in the bet that consumer prices will continue to soar even as central banks prepare to tighten monetary policy after nearly two years of pandemic stimulus.

Inflation-protected government bonds, commodity funds and real estate investment trusts are among the cash-absorbing products in a search for ways to preserve purchasing power.

Congested supply chains, higher energy costs, high government spending, and strong consumer demand have pushed up inflation around the world in 2021.

In November, the US consumer price index rose 6.8% year-on-year – the fastest pace since 1982 – while euro area inflation soared to a record high. 4.9%. More than three-quarters of the countries analyzed by Pew Research recorded higher inflation in the third quarter of 2021 than in the same period in 2019.

Central banks, including the US Federal Reserve and the Bank of England, have signaled their willingness to tighten monetary policy faster than initially expected, but interest rate hikes are still expected to take months.

“We expect inflation to remain high over the next year, well above the Fed’s target, especially as the supply-demand imbalance takes time to resolve,” he said. said Roger Aliaga-Diaz, senior economist at Vanguard, the asset manager of $ 7.2 billion.

Investors therefore try to prepare their portfolios for persistent price pressures, by buying assets that may benefit from rising inflation or protect against it.

This year, a record $ 66.8 billion was poured into funds holding inflation-protected Treasury securities, inflation-indexed U.S. government bonds, according to EPFR, a data provider . BlackRock, the world’s largest asset manager, said it expects inflation to persist at higher levels than before the coronavirus pandemic, and is overweight Tips.

In Britain, the demand for inflation protection is so strong that last month’s sale of £ 1.1 billion of inflation-adjusted gilts maturing in 2073 generated the lowest yield – and the highest price – at auction ever recorded.

Sonal Desai, chief investment officer at Franklin Templeton, warned that inflation-linked bonds could experience “some pretty strange moves” given the Fed’s continued intervention in the market. Instead, she prefers certain commodities or energy-based currencies as indirect hedges against inflation.

“Real assets” such as commodities or real estate have received a second look from investors. A $ 4.5 billion Invesco commodities exchange-traded fund, with holdings in commodity futures contracts including copper, crude oil and soybeans, recorded $ 2.4 billion in ‘entries from January to November of this year. As of October, inflows were more than double that of the same period in 2020. Investors have, however, withdrawn $ 400 million from the fund so far this month.

Gold – historically touted as a safe haven in times of inflation – hasn’t dazzled investors in 2021. The main gold ETF has seen more than $ 10 billion in cash outflows, according to ETF.com. Cryptocurrencies have attracted some investors seeking protection, but the price of bitcoin has fallen sharply since early November.

Energy and inflation are closely related because energy costs play an important role in inflation calculations. Rising oil or natural gas prices directly increase costs to consumers – a higher price for a tank of gasoline or a higher heating bill – and indirectly, by increasing the costs of manufacturing and shipping products. merchandise.

Bets that energy costs will rise have pushed flows to energy-related equity funds to an all-time high this year, according to EPFR.

“Commodities like oil tend to be very good hedges if you expect inflation over the long term,” said Mike Sewell, fixed income portfolio manager at T Rowe Price.

Real estate investment trusts have been a popular bet in the United States because they primarily generate income through rents, which tend to rise along with inflation. Flows into Schwab’s $ 6.8 billion US ETF Reit, the nation’s largest, plunged to record levels when a rent freeze was imposed in the early months of the pandemic, but they fell. are restored.

Some small investors have sought protection against inflation by purchasing so-called Series I U.S. Savings Bonds from the U.S. Treasury, which offer an interest rate of 7.12 percent based in part on inflation. Individuals are only allowed to buy $ 10,000 in Series I bonds each year, but the Treasury said it issued $ 1.3 billion in new bonds in November, the highest monthly figure on record.

Vanguard received large inflows into its Tips products and a commodities fund, said John Croke, head of active management of fixed income products at the asset manager. But he warned “not to overreact to inflation once it’s already built into the market.”

Standard inflation hedges, Croke said, are already too expensive. “Inflation protection is no longer the attractive place it used to be. This opportunity has been neutralized and we are going to hunt to put our tokens in different places. “


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