Rising inflation expectations have been sending notable flows of money into assets that might benefit. Some are attracting more of that cash than others.
Funds invested in inflation-protected bonds, whose face value rises together with the consumer-price index, have seen strong inflows since last May, according to a
report released on Friday. The amount of money that went into those funds over the past year was the highest since 2010.
Investors have shown much stronger interest in the inflation-protected bond funds than in bonds in general. This isn’t surprising: For most of the roughly two decades since 1998, stocks and bond yields have exhibited a positive correlation. That means whenever stock prices came under pressure, bond yields would fall and prices would rise. Allocating some of their assets to bonds gave investors a cushion when stock prices fell.
Lately, though, the pattern hasn’t held up. The degree of correlation between bond yields and stocks has been diminishing since last August, and has been negative since February. When stocks have sold off, bond prices have also come under pressure as their yields have risen. This means bonds may no longer be a good diversifier in portfolios, making them less attractive to many investors.
Historically, this flipped relationship has tended to appear when inflation risks are prominent, as they were during the three decades from the mid-1960s to the late 1990s, wrote Deutsche Bank strategist Parag Thatte. This is because inflation raises the possibility of monetary tightening down the road, which poses risks to both stocks and bonds.
Funds investing in energy and materials stocks, which usually perform better in an inflationary environment and have suffered outflows in recent years, have also seen strong inflows over the past year, especially since November. Financial- stock funds, which typically benefit as rates rise with inflation, have hauled in large amounts of money as well.
Commodities are often viewed as a hedge against inflation, but investors’ confidence in the asset class seems to be weaker this time. Funds backed by physical commodities have mostly seen net outflows over the past months, according to the report, including oil-focused funds, gold funds, and silver funds. Industrial metal funds have recently bucked the trend and saw some inflows this year, but investor interest is still quite modest.
Futures traders aren’t particularly bullish on commodities either, with their long positions, which benefit if prices rise, well within historical ranges. “While price momentum is very supportive, volatility across commodities is also very high, which has constrained exposure,” wrote Thatte in the Friday report.
Write to [email protected]