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Investors pour billions of dollars into inflation-linked assets as consumer prices rise

Investors are flocking to inflation-linked assets with bets that consumer prices will continue to soar even as central banks prepare to tighten monetary policy after nearly two years of stimulus epidemic.

Inflation-protected government bonds, commodity funds and real estate investment trusts are among the cash-strapped products looking to maintain spending power.

Congested supply chains, higher energy costs, massive government spending and strong consumer demand have driven inflation globally in 2021.

In November, US consumer price index rose growing by 6.8% per year – the fastest rate since 1982 – while eurozone inflation climb up record 4.9%. More than 3/4 countries analyzed by Pew Research inflation in the third quarter of 2021 was higher than in the same period of 2019.

Central banks including the United States Federal Reserve and the Bank of England have signaled readiness to tighten monetary policy faster than initially anticipated, but rate hikes could be months away.

“We expect inflation to continue to soar next year, well above our target,” said Roger Aliaga-Diaz, senior economist at Vanguard, a $7.2 billion asset manager. The Fed, especially given the supply-demand imbalance, takes time to resolve.”

As a result, investors are trying to prepare their portfolios for continued price pressure, buying into potentially profitable assets or hedging against rising inflation.

According to EPFR, a data provider, a record $66.8 billion has flowed into funds holding Inflation Protected Securities, index-rated U.S. government bonds this year. inflationary. BlackRock, the world’s largest asset manager, said it expects inflation to continue to be higher than it was before the coronavirus pandemic and takes a key position in Tips.

Column chart of US Tip bond fund, annual flow ($ billion) shows Investors looking for inflation protection

In the UK, the need for inflation protection is so strong that last month’s sale of £1.1 billion in inflation-adjusted gilts maturing in 2073 resulted in the lowest yields – and highest price – in record auction.

Sonal Desai, chief investment officer at Franklin Templeton, warned that inflation-linked bonds run the risk of “some rather strange movements” as the Fed continues to intervene in the market. Instead, she prefers some commodity or energy-based currency as indirect safeguards against inflation.

“Real assets” such as commodities or assets that have received a second look from investors. A $4.5 billion Invesco commodity exchange-traded fund, with holdings in commodities tracking futures including copper, crude oil and soybeans, had $2.4 billion inflows. from January to November this year. By October, however, inflows had more than doubled year-on-year in 2020. However, investors have pulled $400 million out of the fund so far this month.

Gold – which is seen as a haven in times of inflation – did not disappoint investors in 2021. The leading gold ETF had outflows of more than $10 billion, according to ETF.com. Cryptocurrencies have been withdrawn some investors sought protection, but the bitcoin price has plummeted since early November.

Energy and inflation are closely linked because energy costs play a large role in calculating inflation. Rising oil or natural gas prices directly increase costs for consumers – a higher price of gas or a heating bill – and indirectly, by increasing the cost of producing and transporting goods.

Bets that energy costs will rise, according to EPFR, have pushed energy-related equity fund flows to record highs this year.

“Commodities like oil tend to be pretty well hedged, if long-term inflation is expected,” said Mike Sewell, fixed-income portfolio manager at T Rowe Price.

Real estate investment trusts are a popular bet in the US because they primarily generate income through rent, which tends to increase with inflation. Inflows into Schwab’s $6.8 billion US Reit ETF, the largest fund in the country, have fallen to a record low as rent freezes were introduced in the early months of the pandemic, but they have since recover.

Some smaller investors have sought to hedge against inflation by purchasing the so-called Series I US savings bonds from the US Treasury Department, which offers a rate of 7.12% based in part on inflation. Individuals are only allowed to buy $10,000 of Series I bonds per year, but the Treasury Department announced it issued $1.3 billion in new bonds in November, the largest monthly number on record.

John Croke, head of active fixed-income product management at the wealth management firm, said Vanguard has received strong inflows into its Tips products and commodity funds. But he cautioned that “inflation should not be overreacted once it has entered the market”.

Standard inflation hedges are already too expensive, says Croke. “Inflation protection is not as attractive a place as it used to be. That opportunity has been nullified and we will be hunting to put our chips in different places.”

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