Investors who flocked to bonds that offered protection against inflation are now pouring into them in a bet that the Federal Reserve will successfully crush rising prices. Treasury inflation-protected securities (TIPS) have seen five straight weeks of outflows, the longest stretch since April 2020, according to Michael Hartnett, chief investment strategist at Bank of America, writing in a note that investors are “fading inflation.” TIPS are government bonds indexed to inflation to protect investors from declining purchasing power. The principal value of TIPS increases as inflation increases. Stocks saw strong demand as investors hedged against inflation, which by mid-2022 had reached a 40-year high. The record selling came as investors welcomed two encouraging inflation reports this week that showed some progress in the fight against rising prices. US consumer prices rose 8.5% year-on-year in July, slower than June and weaker than expected. Wholesale prices also fell last month, the first decline in two years. “The fall in inflation, which peaked a few months ago, is now showing up in the headline data in a significant 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 very good news and decreases the odds of stagnation and the need for a major recession to break embedded inflation.” The largest exchange-traded fund that tracks TIPS, the iShares TIPS Bond ETF, has fallen more than 10% this year amid tightening efforts by the Federal Reserve. The central bank has aggressively raised interest rates and reversed its massive bond-buying program, shrinking the size of its balance sheet and raising real yields. Wall Street has been watching the TIPS market closely, as a decline in value could also signal an improving outlook for inflation and that the Fed is doing its job to combat price pressures. “The market seems to be taking comfort in the fact that we are apparently past the inflation peak and 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, I expect inflation data to come down in the coming months.”
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