ETFChannel.com

The case for inflation-linked bonds

Mon, Jan 6, 10:14 AM ET, by , BlackRock

We view inflation risks as underappreciated for 2020 - and beyond. Our base case is for modestly higher U.S. inflation this year, with a risk of upside surprises. Drivers include rising wages and energy price volatility in the short term, and deglobalization over time. We like Treasury Inflation-Protected Securities (TIPS) on a tactical basis as their valuations look attractive relative to our inflation outlook. On a strategic basis, TIPS can also serve as a source of portfolio resilience against both inflation and growth shocks.

Government bonds play an important role cushioning multi-asset portfolios against equity selloffs. Our analysis showed both nominal U.S. Treasuries and their inflation-linked peers have generated positive returns when growth shocks triggered equity selloffs - albeit with nominal bonds beating TIPS. Why? Declines in both expected inflation and real rates help drive up nominal bond returns, while TIPS only benefit from falling real rates under such a scenario. TIPS' relatively limited liquidity may also mute their rally during any market stress. But TIPS have outperformed in inflation shocks. See the chart above. The “double resilience” property of TIPS - their ability to cushion against adverse growth and inflation surprises - is why we see a case for substituting some nominal government bond exposures for TIPS in strategic allocations.

The dovish pivot by key central banks in 2019 and easing of financial conditions have played an important role in setting up global growth for a modest pickup this year - our base case for 2020. We already see inflation firming on the back of rising capacity utilization and stronger wage growth. The potential for upside inflation surprises in the U.S. has led us to favor TIPS on a 6-12 month tactical horizon. Our BlackRock Inflation GPS points to core (excluding food and energy) consumer price inflation rising to around 2.4% in six months' time, slightly above consensus expectations and the November reading of 2.3%. Yet market-based inflation expectations remain depressed. The pricing of 10-year TIPS implies an expected average annual inflation rate of just 1.8% over the next decade - a persistent undershoot of the Federal Reserve's inflation target. Meanwhile the U.S. labor market boasts the lowest unemployment level in nearly half a century and wage gains are near their strongest in a decade. We believe the Fed will likely allow temporary inflation overshoots and see a high bar for it to raise rates. This all points to upside risks to inflation - and an attractive entry point for TIPS given depressed market prices.

icon-pointer.svgRead more market insights in our Weekly commentary.

Over time we also see the risk of a regime shift that raises inflationary pressures while dragging on growth. Supply shocks stemming from structural trends such as deglobalization are one potential trigger. Geopolitical and trade frictions could disrupt global supply chains. This would reduce productivity and reinforce a slowdown in potential growth, while pushing up input costs. When such supply shocks dominate, stock and bond prices often have moved in the same direction, our analysis of the U.S. business cycle since 1965 shows. This would be a big shift from the environment since the late 1990s, when the negative correlation between stock and bond returns made bonds effective portfolio diversifiers. TIPS could provide some portfolio resilience under such a scenario, we believe. The market price dynamics described earlier make it a good time to start building a strategic TIPS position, in our view, even as we expect trade tensions likely to move sideways in 2020.

Bottom line

We like TIPS on a tactical basis but would avoid inflation-linked bonds in the euro area or Japan as inflation expectations still appear depressed but actual inflation rates are stubbornly below central banks' targets. On a strategic basis a blend of nominal and inflation-linked U.S. government bonds could create resilience to a variety of adverse conditions, including both growth and inflation shocks. We also tilt toward U.S. Treasuries for portfolio ballast, as European and Japanese government bond yields appear to near lower bounds, diminishing their ability to cushion portfolios.

Mike Pyle, CFA, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy function within the BlackRock Investment Institute. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 2020 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. ©2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners. BIIM0120U-1037459

How to use iBonds like a pro
Thu, Feb 27, 5:44 PM ET,
by , BlackRock

Where we stand on factors
Wed, Feb 26, 5:14 PM ET,
by , BlackRock

3 reasons to stick with tech stocks
Fri, Feb 21, 8:04 AM ET,
by , BlackRock

Coronavirus testing our global outlook
Thu, Feb 20, 11:04 AM ET,
by , BlackRock

How disruption is changing the growth vs. value debate
Wed, Feb 19, 9:34 AM ET,
by , BlackRock

More articles:  1 2 3 4 5 6 7 next »

  BlackRock   Investment   TIPS   This   also   basis   bond   bonds   both   from   growth   have   inflation   information   market   nominal   portfolio   rates   resilience   shocks   strategic   such   their   this   time
10 ETFs With Stocks That Insiders Are Buying
10 ETFs With Most Upside To Analyst Targets
25 Dividend Giants Widely Held By ETFs
25 S.A.F.E. Dividend Stocks Increasing Payments For Decades
Broker Darlings: Top 15 Analyst Picks of the Dow
Top 25 Broker Analyst Picks of the S&P 500
Forgotten S&P 500 Giants: Analysts' Current Least Favorites
25 Top Ranked Socially Responsible Dividend Stocks
10 Oversold ETFs
The Top 10 DividendRank'ed Stocks
Warren Buffett Dividend Stocks
The DividendRank Top 25
The Top 10 DividendRank'ed DJIA Components
The Top 10 DividendRank'ed Dow Transports Components
The Top 10 DividendRank'ed Dow Utilities Components
The Top 10 DividendRank'ed Nasdaq 100 Components
10 Stocks Going Ex-Dividend
10 Oversold Dividend Stocks
10 Stocks Where Yields Got More Juicy
10 Dividend Bargains You Can Buy Cheaper Than Insiders Did
Top Ranked Dividend Stocks With Insider Buying
10 Energy Stocks You Can Buy Cheaper Than Insiders Did
10 Metals Stocks You Can Buy Cheaper Than Insiders Did
10 Oversold Metals Stocks
10 Must-Know High-Yield REITs
10 Top DividendRank'ed Financials
10 Top DividendRank'ed Metals Stocks
10 Oversold Energy Stocks
10 Top DividendRank'ed Energy Stocks
10 Top DividendRank'ed Utility Stocks
10 Stocks Crossing Below Book Value
10 Stocks Crossing Above Their 200 Day Moving Average
10 Stocks Crossing Below Their 200 Day Moving Average
10 ETFs Crossing Above Their 200 DMA
The 10 Biggest ETFs
The 10 Best ETF Performers
Best Vanguard ETFs By TTM Performance
Worst Vanguard ETFs By TTM Performance
Best iShares ETFs By TTM Performance
Worst iShares ETFs By TTM Performance
The 10 Worst ETF Performers
10 ETFs With Notable Inflows
10 ETFs With Notable Outflows
Top 10 Analyst Rated Consumer Stocks
Top 10 Analyst Rated Dividend Stocks
Top 10 Analyst Rated Energy Stocks
Top 10 Analyst Rated Financial Stocks
Top 10 Analyst Rated Healthcare Stocks
Top 10 Analyst Rated REIT Stocks
Top 10 Analyst Rated Technology Stocks
Best Dividend Stocks 2000-2020
Best High Dividend Stocks 2000-2020
Top Dividend Stocks 2010-2020
Best High Yield Stocks 2010-2020
Top Dividend Stocks 2015-2020
Top High Dividend Yield Stocks 2015-2020
The Top 10 DividendRank'ed Canadian Stocks
The DividendRank Canada Top 25
10 Canadian Stocks Going Ex-Dividend
10 Oversold Canadian Stocks
10 Canadian Stocks Where Yields Got More Juicy
10 Must-Know High-Yield Canadian Real Estate Stocks
10 Top DividendRank'ed Canadian Financials
10 Must-Know High-Yield Canadian Energy Stocks
10 Canadian Stocks Crossing Below Book Value
10 Canadian Stocks Crossing Above Their 200 Day Moving Avg
10 Canadian Stocks Crossing Below Their 200 Day Moving Avg
Stock market game

The case for inflation-linked bonds | ETF Channel | www.ETFChannel.com

Copyright © 2010 - 2020, All Rights Reserved Nothing in ETF Channel is intended to be investment advice, nor does it represent the opinion of, counsel from, or recommendations by BNK Invest Inc. or any of its affiliates, subsidiaries or partners. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All viewers agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. By visiting, using or viewing this site, you agree to the following Full Disclaimer & Terms of Use and Privacy Policy. Video widget and ETF videos powered by Market News Video. Quote data delayed at least 20 minutes; data powered by Ticker Technologies, and Mergent. Contact ETF Channel; Meet Our Editorial Staff.