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Investors Are Flocking to Inflation-Linked Assets

Commodities, real estate investment trusts and certain government bonds are becoming more popular.
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Investors are betting that consumer prices will continue to rise by piling into inflation-linked assets like certain government bonds, commodity funds and real estate investment trusts, the Financial Times reports.

Although central banks like the U.S. Federal Reserve are signaling plans to tighten monetary policy more quickly than expected to help curb inflation, many investors believe interest rates hikes are still months away. 

“We expect inflation to remain elevated in the next year, well above the Fed target, particularly as the supply-demand imbalance takes time to sort itself out,” Roger Aliaga-Diaz, senior economist at Vanguard, told the FT. 

The U.S. consumer price index climbed to 6.8% in November, the quickest pace since 1982, driven in part by supply-chain bottlenecks, higher energy costs and strong consumer demand. 

Inflation in the eurozone rose to 4.9% last month, a record high since the single currency was created more than two decades ago, the FT notes.

A record $66.8 billion has flowed into funds holding Treasury inflation-protected securities (Tips), which are U.S. government bonds that are indexed to inflation, according to the FT, citing data provider EPFR. 

It also reported that BlackRock, the world’s largest asset manager, has an overweight position in Tips. 

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Sonal Desai, chief investment officer at Franklin Templeton, told the FT that inflation-linked bonds were at risk of “some fairly strange movements” with the Fed’s continued intervention in the market. 

Desai prefers certain energy-based commodities or currencies as indirect hedges to inflation, and she's not alone.

The FT notes that “real assets” like commodities and physical real estate are becoming increasingly popular among investors. 

For instance, it cites a $4.5-billion Invesco commodities exchange-traded fund, with holdings in futures tracking commodities including copper, crude oil and soybeans, had $2.4-billion of inflows from January to November this year. 

Through October the inflows were more than double those over the same period in 2020. 

REITs are also increasingly popular as higher inflation drives up rents. The FT says flows into Schwab’s $6.8-billion U.S. Reit ETF, the largest in the country, have recovered from the hit taken in the early days of the pandemic when rents were frozen.

Gold, considered an inflation hedge, hasn't been the standout some may have expected. The price of gold is down about 5% over the past month to around $1,778 per pounce. 

Meantime, cryptocurrencies, considered by some riskier investors, are considered another form of inflation protection, but bitcoin has fallen by about 25% over the past month.