Reflation Diehards Are Dialing Up $1.1 Billion Bet on TIPS ETF

Exchange-traded fund investors are adding to bets that the long-awaited uptick in U.S. inflation is on its way.

Roughly $1.1 billion has been funneled over the past six days into BlackRock Inc.’s $25.7 billion iShares TIPS ETF (ticker TIP), which tracks inflation-linked U.S. Treasuries, according to data compiled by Bloomberg. That’s the strongest streak over such a span since early March, before the coronavirus upended financial markets and forced global lockdowns, crushing inflation expectations.

Momentum is building behind the reflation trade as Covid-19 vaccines start to be administered and U.S. lawmakers debate another round of fiscal aid. A resurgence in global growth in 2021, along with the Federal Reserve’s increased tolerance for inflation, should fuel price pressures and favor securities that protect against cost-of-living increases, according to Mizuho International Plc’s Peter Chatwell.

“The U.S. inflation view is still dramatically underpriced,” said Chatwell, Mizuho’s head of multi-asset strategy. “I would expect to see much more inflows into TIP and other similar ETFs in the coming few months. I think the market in the second quarter will be particularly interested in inflation protection.”

A flurry of vaccine breakthroughs have buoyed five-year breakeven rates -- a proxy for inflation expectations measured by the yield difference in linkers and regular Treasuries -- to the highest level since March 2019. Meanwhile, the spread between two- and 10-year Treasury yields touched the steepest level in three years last week, a bet on a healthy economy and higher interest rates to come.