Inflation heated up again this week, but it’s nowhere near as hot as funds specializing in bonds that fight it.
Mutual funds and exchange-traded funds that buy TIPS, or Treasury inflation-protected securities, are boasting yields of 8% or more in a bond market where even 4% looks outlandish. Such funds took in an estimated $36.3 billion in new money in the first half of 2021, according to Morningstar—a record for any six-month period since TIPS funds were born in the late 1990s.
If an 8% yield tempts you to join them, listen up. These funds that purport to fight inflation are, ironically, inflating their own reported yields.
I’ve written about this problem before, but it’s never been worse. This week, every single inflation-protected security was trading at a negative yield to maturity before inflation. Yet more than two dozen mutual funds and ETFs that own these bonds are reporting yields of 6%, 7%, even 8% or more.
How the heck can that be? Are investors expecting double-digit rises in the cost of living? Or are fund companies exploiting a regulatory loophole for marketing purposes?