Investors who flocked to bonds that offered protection against inflation are now dumping them in a bet that the Federal Reserve will successfully squash surging prices. Treasury Inflation Protected Securities (TIPS) have seen five straight weeks of outflows, the longest stretch since April of 2020, according to Bank of America’s chief investment strategist Michael Hartnett, who wrote in a note that investors are “fading inflation.” TIPS are a government bond indexed to inflation to protect investors from the decline in purchasing power. The principal value of TIPS rises as inflation rises. The securities saw huge demand as investors hedged against inflation that, by mid-year 2022, had reached a 40-year high. The selling record came as investors this week welcomed two encouraging inflation reports that showed some progress in the fight against soaring prices. U.S. consumer prices rose 8.5% year over year in July , slower than June and lighter than expectations. Wholesale prices also fell last month, the first decline in two years. “The decline in Inflation, which peaked a few months ago, is now showing up in the headline data in a meaningful way,” said Jamie Cox, managing partner at Harris Financial Group. “The Fed now has plenty of cover to reduce the pace and size of future rate hikes. This is really good news and decreases the odds of stagflations and the need for a big recession to break the back of embedded inflation.” The biggest exchanged-traded fund that tracks TIPS — the iShares TIPS Bond ETF — has fallen more than 10% this year amid the Federal Reserve’s tightening efforts. The central bank has aggressively raised interest rates and reversed its massive bond-buying program, shrinking the size of its balance sheet, sending real yields higher. Wall Street has been closely watching the TIPS market as a drop in value could also signal an improving inflation outlook and that the Fed is doing its job in fighting price pressures. “The market seems to be taking comfort in the fact that we’re seemingly past peak inflation and we should continue to see declines in the second half of the year,” said Brian Price, head of investment management at Commonwealth Financial Network. “If energy prices continue to fall, then I expect that we’ll see inflationary data coming down in future months.”
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