USD inflation-linked bond ETFs received €900m in net inflows last month, and were the second most popular ETF investment after global equities, which saw €1.5bn in net inflows. The inflows into TIPS (Treasury Inflation Protected Securities) ETFs were the biggest ever recorded in a calendar month, and are higher than all the inflows of the previous five months combined.
Investors are clearly anticipating an acceleration of inflation expectations in the United States. US 10-year break-even inflation is currently around 2%. This is suspiciously low, considering consumer price inflation now stands at 2.7%. Add to that the presumed inflationary impact of the Trump presidency, and TIPS are a close to a no-brainer compared to nominal US government bonds.
TIPS also look attractive compared to European investment-grade bonds, which will struggle to even provide real returns over the next few years. The spread between US and German government bonds currently is more than 200 basis points.
Little surprise therefore that European investment-grade bond trackers were sold off in February. EUR corporate bond ETFs suffered the largest net outflows, at €1.3bn.