Quiver Quantitative - As inflation in the US shows signs of easing, investors are increasingly withdrawing their money from exchange-traded funds (ETFs) focusing on inflation-protected bonds. In November alone, a significant $400 million was withdrawn from key ETFs targeting Treasury Inflation-Protected Securities (TIPS), marking the largest monthly outflow since January 2022. This shift comes amidst a broader bond market rally, with the Bloomberg US Treasury Index outperforming the Bloomberg TIPS Index, rising 3.5% against the TIPS Index’s 2.7% gain.
The movement away from TIPS ETFs aligns with recent economic data indicating a slowdown in inflation. The Personal Consumption Expenditures (PCE) deflator, a critical gauge for the Federal Reserve, is trending towards falling below the Fed's end-2023 projection. This change is leading bond markets to anticipate Federal Reserve rate cuts within the next year, despite cautionary statements from Fed Chair Jerome Powell about the pace of future rate adjustments.
Investors' focus now shifts to the upcoming US consumer inflation data, which coincides with the Federal Reserve's two-day meeting in mid-December. This meeting will update key economic projections, including core inflation and rate policy. This shift in investor sentiment is part of a broader trend, as seen in other global markets. For instance, Euro-zone inflation is cooling faster than expected, and Brazil's annual inflation is slowing, which could lead to more monetary easing in these regions.
Key US economic releases in the coming weeks, including non-farm payrolls, the CPI report, and personal income and spending data, will be crucial for investors. These reports will offer further insights into the inflation trajectory and influence future investment decisions in inflation-linked bonds and other related securities.
This article was originally published on Quiver Quantitative