(Bloomberg) -- At least one corner of the $4.4 trillion exchange-traded fund market is betting the Federal Reserve can juice inflation.
Investors plowed nearly $500 million into BlackRock Inc.’s $22 billion iShares TIPS Bond ETF, which tracks inflation-protected securities, on Tuesday, according to data compiled by Bloomberg. The cash influx was the biggest since April 2015 and followed the Fed’s surprise rate reduction, geared toward cushioning the world’s largest economy from the impact of the coronavirus.
While inflation expectations tend to rise after the Fed lowers rates, bond-market measures show traders remain deeply skeptical. Still, the U.S. economy was on solid footing before the outbreak and that could translate into a pick-up in inflation when the disease subsides, said Thomas Simons, senior money market economist at Jefferies LLC.
“It’s a case of short-term versus long-term prospects being very different,” Simons said. “The Fed’s easing should make for a situation where growth and inflation accelerate quickly once the virus fears abate.”
The so-called real yield on 10-year Treasury Inflation-Protected Securities traded near negative 45 basis points on Wednesday. Meanwhile, the five-year breakeven rate -- which represents investors’ view on the annual inflation rate through 2025 -- hovered near a five-month low.
Regardless, BlackRock’s TIPS fund -- the largest inflation-focused ETF -- has already attracted $882 million in inflows since Friday. That put the ETF on track for its strongest week since 2016.
Betting on a inflation revival was a popular bond call coming into 2020, with the likes of Pacific Investment Management Co. and State Street Corp. backing the trade. Momentum quickly sputtered as the virus rocked financial hubs worldwide, leaving major cities in virtual lockdown and disrupting supply chains.
Still, there’s a case to be made for owning inflation-linked bonds, in the eyes of Priya Misra at TD Securities.
“I like TIPS breakevens because they are cheap on a fundamental basis,” said Misra, TD’s head of global rates strategy. “Inflation risk premium is higher with a dovish Fed rather than with a hawkish Fed.”
©2020 Bloomberg L.P.
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