Investors yank money out of ETFs tracking inflation-protected bonds

INVESTORS are yanking cash out of the market for inflation-protected bonds as price pressures moderate in the US, even as the securities rallied along with the broader market in November.

A combined US$2.2 billion was pulled out of five major exchange-traded funds that target the Treasury’s inflation-protected securities in November, according to data compiled by Bloomberg. That’s the biggest monthly outflow from those funds since October 2022. 

The outflows came as recent data revealed softening inflation, and an index of nominal Treasury bonds rallied the most since November 2008. The Bloomberg US Treasury index gained 3.5 per cent last month, outpacing a 2.7 per cent rise in the Bloomberg TIPS index, its best since March. 

Personal income and spending report released this week showed the PCE deflator – the Federal Reserve’s preferred metric for assessing progress on its inflation mandate – was on course to fall below the central bank’s median forecast of 3.7 per cent for end-2023, according to Bloomberg Economics. 

Ebbing inflation and a slowing economy has compelled the bond market back to pricing in Fed easing over the next 12 months, with swaps traders leaning toward a first rate cut as early as March. Even so, Fed Chair Jerome Powell has pushed back against Wall Street’s expectations, saying the committee will move cautiously.

Investors will now pay close attention to US consumer inflation figures released as the Fed begins its two-day meeting in mid-December. At that meeting, the Fed will upgrade its summary of economic projections, including core inflation and rate policy estimates. BLOOMBERG