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Inflation anxiety turns TIPS into $ 1.6 trillion market to watch



The United States is set to sell 10 years of inflation-linked debt next week, keeping the spotlight on the corner of the bond market, which rarely attracts so much attention in almost a quarter of a century since its debut.

Increased fears of the risk of rampant consumer price rises as the recovery resumes are prompting investors from all over the world to seek cover in government-protected securities, a market that has risen to $ 1.6 trillion. Traders talk about new entrants as retail buyers and global macro strategists – what veterans call a “tourist crowd.” Cash is also flowing into the largest traded on the stock exchange TIPS fund, part of the frantic demand that leads to inflation expectations over the next half decade to a 1

6-year high.

All this is added to rotating head for inflation traders. They say they were surprised by the surge in activity and the speed with which last year’s recession caused by a pandemic gave way in some minds to the level of anxiety in the 1970s regarding uncontrolled inflation. Chris McReynolds of Barclays Plc likens TIPS pricing volatility to “watching table tennis while sitting in the middle of the table.”

The US inflation forecast is reaching a 16-year high

Leaving aside the questions of whether TIPS are overestimating inflationary pressures, traders see an opportunity at a time when forecasts for some key data, including consumer prices, have been going out of line with the actual readings. Gang Hu of hedge fund WinShore Capital Partners says he has seen many traders exit TIPS positions for most of this year as market inflation expectations have risen. He says the $ 13 billion auction on Thursday of inflation-linked debt will be seen as a key indicator of investor appetite and a possible opportunity for some to return.

“In fact, no one is doing very well where the short-term inflation footprints will land, and that’s throwing everyone out of their game,” said Hu, a managing partner at the New York-based fund. “There is a lot of noise in the latest prints and it’s not over yet. There is no way anyone can be very confident in what the next two or three prints will bring. “

Fed test

This stimulates instability in a part of the bond market that has not typically seen such activity, with volumes fluctuating from week to week as the inflation readings above assess the Federal Reserve test. a frequently repeated message that the pressure is likely to be temporary.

Over the past week, the forecast for five-year inflation or at zero percentage, jumped to 2.82%, the highest since 2005, after a larger-than-expected jump in consumer prices for april. The ten-year nominal treasury yield reached its highest level in more than a month this week.

Bond signals have wide implications for different markets. Shares have plummeted since February after inflation, while traders pulled the time when they expect the Fed to raise interest rates, and a measure of consumer sentiment unexpectedly collapsed this week. Fear of inflation is also an engine flurry of corporate issuance.

Transient or not, signs of inflation are moving asset markets

“Obviously we’ve experienced a lot in this part of the market over the last 14 months, from ‘Wow, this pandemic is deflationary’ to ‘Well now, there’s inflation,'” McReynolds, head of inflation trading in the United States at Barclays in New York. “What is different in this episode is the crazy instability, in which investors move from hating TYPES to loving them, to hating again. We will probably be here for at least a few years, ”with instability heightened around consumer price announcements.


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