What inflation wary ASX investors need to know about TIPS

ASX investors are waking up to the possibility that maybe inflation won’t remain humbly muted for as long as the RBA forecasts.

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ASX investors are waking up to the possibility that maybe, just maybe, inflation won’t remain humbly muted for as long as the world’s central bankers are forecasting. A scenario that could see interest rates rising sooner than promised.

Along with launching a massive quantitative easing (QE) program, the Reserve Bank of Australia (RBA) joined the US Federal Reserve and other leading central banks in slashing interest rates to near zero in an effort to revive economies knocked down by the global pandemic.

While that’s largely proven effective, a growing number of investors appear to doubt the central banks’ claims that resurgent inflation won’t force them to raise official interest rates before 2024.

For some insight into just how much money is looking for protection against rising inflation, we turn to the TIPS market.

Why inflation wary ASX investors should follow the TIPS

If you’re not familiar with TIPS, it stands for Treasury Inflation-Protected Securities, issued by the United States government.

And the TIPS market is booming, reaching some US$1.6 trillion.

As Bloomberg reports:

Heightened fears about the risk of raging consumer-price gains as growth rebounds are driving investors of all stripes to search for cover in Treasury Inflation-Protected Securities, a market that’s grown to $1.6 trillion.

Last week the 5-year inflation outlook in the US reached 2.82%. That’s the highest level since 2005. As far as where inflation is really heading in the near term, that appears to be anyone’s guess.

Gang Hu, at New York based hedge fund WinShore Capital Partners, is keeping a keen eye on this Thursday’s US$13 billion auction of the inflation-linked debt by the US government.

According to Hu:

Nobody actually has a very good handle on where near-term inflation prints will land, and it’s thrown everyone off their game. There’s a lot of noise in the recent prints and this is not over yet. There’s no way anyone can be very confident about what the next two or three prints will bring.

ASX 200 slides on inflation fears

Many analysts and economists remain confident that the inflation showing up in developed economies is transitory and likely to fade within 12 months. But that didn’t stop investors from hitting the sell button last week.

After hitting an all-time closing high last Monday, the S&P/ASX 200 Index (ASX: XJO) finished the week down 2.2%.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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