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Inflation and TIPS | Economy21

New data on global capital allocations show that foreign holdings of US Treasury inflation-protected securities widened in 2021 as global investors reduced their exposure to nominal cash-generating assets in response to high inflation. Chinese investors reduced their holdings of TIPS by $22 billion, but the rest of the world increased their allocation by $75 billion. Last June, foreign investors accounted for 43% of the TIPS market compared to 38% in the nominal bond markets. This TIPS trend is set to continue: fears of a global recession could cause central banks to scale back their rate hike plans, rekindling inflation fears around the world and encouraging investors to add protection against inflation directly correlated to their portfolios. After all, because the government cannot inflate its inflation-protected debt, the TIPS market is likely to see strong demand as long as inflation remains a concern.

Inflation around the world is likely to drive a large group of investors – with different investment styles and different goals – into the TIPS market, helping to create in-depth and reliable price discovery in a market that has historically lacked liquidity. . Especially as the Fed cancels its asset purchase programs (which tend to distort market prices), TIPS prices will more accurately reflect the market price for inflation insurance. From a policy perspective, a more efficient TIPS market could help the Fed anticipate inflation expectations and set policy accordingly. It appears that the TIPS market is set to become more relevant over the years, not only as an option for global investors, but also as an increasingly trusted source of information for bank decision makers. power stations.

Source: May 23, 2022 MMO (wrightson.com)

Yale sophomore Thomas Triedman is a 2022 Summer Collegiate Associate at the Manhattan Institute

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