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ETF investors abandon inflation bets amid doubts on Fed goal

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(Bloomberg) — Investors who piled into inflation-linked bond funds for nine straight months are reversing course in the latest sign markets aren’t buying the Federal Reserve’s outlook for price gains.

Traders yanked almost a half a billion dollars last month from U.S. exchange-traded funds holding government securities that protect against inflation. The withdrawals came as a bond-market gauge of expected price increases fell to the lowest since May 2009. The central bank, which seeks to achieve 2 percent inflation, is poised to raise interest rates even as debt markets harbor little optimism about price acceleration.

“The market is saying one thing, which is a different view than what the Fed is saying,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “We’ll see who blinks first.”

Investors pulled $478 million from 18 inflation-linked bond ETFs in August, the most since September 2014, according to data compiled by Bloomberg.

Lowered expectations

They had funneled $2.1 billion into the funds between January and July amid greater confidence that central banks would be able to spur price gains. The ETFs invest in bonds such as Treasury Inflation-Protected Securities, whose face value rises or falls according to a gauge of price increases.

Average inflation expectations over the next 10 years dropped to 1.44 percent on Aug. 24, the lowest since May 2009. Fed Vice Chairman Stanley Fischer on Aug. 29 reiterated his view that inflation will move closer to the central bank’s 2 percent goal, and kept the door open for the Fed to raise interest rates when it meets this month.

Disinflationary pressure

Inflation-indexed securities have lost investors almost 1 percent this year, compared with a 1 percent gain for the broader Treasury market, according to Bank of America Merrill Lynch index data.

Plunging prices of oil and other commodities, along with volatility in equity markets, renews the specter of global disinflation, John E. Silvia, chief economist at Wells Fargo Securities, wrote in a note to clients Aug. 31.

“Deflationary pressure is more likely” than inflationary pressures for the global economy in the near term, Silvia said.

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