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Inflation backdrop may increase appetite for this roughed-up bond play

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The appetite for Treasury inflation-protected securities ETFs, otherwise often called TIPS, may soon increase.

In response to Charles Schwab’s D.J. Tierney, these investments have gotten more appealing because the economy shows further signs of a slowdown.

“With the speed move upward and inflation breakevens, [TIPS ETFs] might make more sense at once than they did a yr or two ago,”  the firm’s senior investment portfolio strategist told CNBC’s “ETF Edge” last week. “We still consider in it for the long haul.”

TIPS ETFs are indexed to inflation, so their principal value is adjusted up when inflation rises. Despite major inflows in 2020, TIPS ETFs have been seeing meaningful outflows this yr.

“What you are seeing in 2022, it’s just just a little little bit of the pendulum swinging the opposite way,” Tierney said. “Is inflation as big a priority at once moving forward because it was a yr ago? Probably not. Investors may need made tactical allocations towards TIPS ETFs and possibly they’re pulling that back just a little bit.”

Tierney is the client liaison for Schwab U.S. TIPS ETF, which is down 16% thus far this yr. Nonetheless, over the past two months it’s up greater than 2%.

‘Very tough yr’

“It’s just heartening that within the face of a really tough yr, we’re still seeing investors in aggregate utilize ETFs as a long-term investment vehicle,” Tierney said.

Nonetheless, VettaFi financial futurist and ETF expert Dave Nadig cautioned TIPS breakevens are inclined to be driven more by investor sentiment than reality.

“TIPS are one among these items which might be notoriously difficult for even really great traders to get right,” he said. “The old adage is by the point you’ve got decided to make a trade in TIPS either in or out, you are probably flawed.”

But when investors can get timing right, Nadig said the TIPS downtrend may soon reverse.

“We have had massive outflows in TIPS, however the breakeven on the 10-year TIPS is 2.3%, which suggests you’ve got to consider inflation goes to average lower than 2.3% to decide on the straight Treasury over the 10-year TIPS,” Nadig said. “I believe that is a reasonably good bet … that now could also be the appropriate time to get in.”

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