Inflation-Indexed Treasuries Lead U.S. Bond Market Returns In 2021
James Picerno | Dec 07, 2021 11:23AM ET
How’s that allocation to bonds working out this year? Probably pretty good, if you favored Treasury Inflation Protected Securities (TIPS).
With less than four weeks left to the trading year, TIPS are on track to capture the lead for U.S. bond-market performance in 2021, based on a set of ETFs through yesterday’s close (Dec. 6).
Short-term Treasury Inflation Protected Securities are currently in first place via iShares 0-5 Year TIPS Bond ETF (NYSE:STIP), which is ahead 5.2% year to date. As you might expect, the ride this year via STIP has been relatively smooth. Indeed, STIP’s ascent in 2021 has been a low-vol party as the ETF barely traded below its 50-day moving average this year.
This year’s second-place bond performer is only slightly behind STIP, but the ride has been far more rocky. The iShares TIPS Bond ETF (NYSE:TIP) is up 5.0% in 2021, second only to STIP. But the path to that second-place performance has been considerably more volatile, thanks to a higher effective duration (a measure of interest-rate sensitivity) for the portfolio: roughly 7.7 vs. 2.6 for STIP, according to Morningstar.com.
Overall, there have been moderate headwinds for U.S. bonds writ large. Only six of our 15-bucket definition of fixed income are currently posting gains this year. Several of the losers can blame longer duration as a risk factor that backfired. That includes the deepest shade of red in 2021 for the opportunity set via iShares 10-20 Year Treasury Bond ETF (NYSE:TLH), which is down 4.1% through yesterday’s close.
The U.S. benchmark for fixed income — Vanguard Total Bond Market Index Fund ETF Shares (NASDAQ:BND) – is off 1.4% year to date.
Get The News You Want
Profiling all the funds listed above through a momentum lens (based on moving averages) reflects a weak trend of late. Notably, the short-term proxy for momentum has collapsed to the lowest reading since early 2018. Contrarians may find the reversal intriguing, but buying here is effectively a bet that interest rates will hold steady or fall. In turn, deciding if that’s a reasonable view or not requires a view on inflation, namely, predicting how soon will it ease?
Mohammed Kazmi, a portfolio manager at Union Bancaire Privée, is inclined to stay cautious. “Previously, central banks were using COVID concerns to remain dovish,” he tells the Financial Times. “But this time around we’ve reached the point on the inflation front, at least for the Fed, where they’re not going to do that any more.”
That’s a reasonable assumption, at least for the immediate future, based on Econoday.com’s consensus point forecast for this week’s November update on U.S. consumer inflation (scheduled for release on Friday, Dec. 10). Economists are expecting headline CPI will continue to rise on a year-over-year basis, picking up to 6.8% — a 39-year high!
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.