The big news this week was the results of the July Consumer Price Index (CPI), published on Wednesday, August 11, and the Producer Price Index (PPI), released on Thursday, August 12. Both the CPI and PPI reports highlighted concerning 12-month increases. The CPI all-items index rose 5.4% over the last 12 months (hovering around 13-year highs). The PPI reported the final demand index jumped 7.8% for the 12 months ended July 2021, the largest advance since the data was first calculated in 2010.
While the 12-month index increases are headline-grabbing, ask yourself where you were a year ago. The economy was still in the initial stages of opening. Base effects will continue to influence these headline numbers for the foreseeable future and should be viewed as only one data point making up the entire health of our economy. The month-over-month increases, on the other hand, paint a more optimistic picture. The July CPI increased 0.5% after skyrocketing 0.9% in June. Core-CPI (less food and energy) rose 0.3% in July, contrasted with 0.9% in June. The PPI reported the final demand for goods index moved up 0.6% in July after a 1.2% surge in June.
The month-over-month figures may provide some ease on the inflationary pressures and fears consuming our markets while giving some taxable bond funds some tailwinds for future capital inflows. Two key factors that affect bond pricing are inflation rates and interest rates. Typically, an increase in either rate will drop the price of a bond. To tackle inflation, the Fed may decide to raise interest rates which increases the cost of borrowing. When interest rates rise bond yields typically follow, leading to newly issued bonds becoming more attractive than existing bonds. As the demand for existing bonds falls, so does their price. Even without increasing interest rates, persistent inflation will erode the purchasing power of future coupon payments. This also decreases the value of existing bonds being held within portfolios.
To mitigate both these risks that have been prevalent in today’s environment, investors have stormed into Lipper Inflation Protected Bond Funds (+$43.6 billion) and Lipper Loan Participation Funds (+$30.4 billion). The year-to-date flows rank third and fifth highest among fixed income Lipper classifications. As the market consistently funneled capital into both classifications this year, it avoided corporate bond funds. The Lipper Corporate Debt Funds BBB-Rated (-$7.3 billion) ranked second highest in net outflows since the start of the year.
Are the tides turning? If the inflationary data remains moderate and the Federal Reserve insists on tapering asset purchases before any short-term rate increase, we may see weekly net flows for both Lipper Inflation Protected Bond Funds and Lipper Loan Participation Funds comparable to this past week. Corporate debt funds could reap the rewards. This past week Lipper Corporate Debt Funds BBB-Rated (+$2.3 billion) outpaced Lipper Inflation Protected Bond Funds (+$523 million) and Lipper Loan Participation Funds (+$423 million). The Lipper Corporate Debt Funds BBB-Rated classification logged their largest weekly inflow since early June 2020 (find more weekly trends here).
Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Find out more.
Join a growing community of asset managers and stay up to date with the latest research from Refinitiv and partners to help you inform your investment decisions. Follow our Asset Management LinkedIn showcase page.
