U.S. investors weigh TIPS, commodities for inflation hedging

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Investors weigh TIPS, commodities

Highlights

September's headline CPI is expected at 3.6% and NY Fed's one-year inflation outlook rose to 3.9%, highest since May 2023.
The iShares TIPS Bond ETF is down 1.16% year to date due to higher real yields, with the 10-year TIPS yield now at 2.87%.
Commodities and infrastructure assets are gaining appeal for inflation hedging, as their contracts often include inflation-linked revenue adjustments.

Inflation protection options gain focus

As reported by CNBC, investors are watching Wednesday's Consumer Price Index release for signs that inflation remains persistent, even after slowing sharply from its 2022 peak. The headline CPI reading is expected to reach 3.6% in September, partly because of higher energy costs linked to the war with Iran, while the Fed's preferred Personal Consumption Expenditures index stood at a 3% core rate in August.

Concern about future price increases is also building among consumers. The New York Fed's Survey of Consumer Expectations shows the one-year inflation outlook rose to 3.9% in September, its highest level since May 2023.

TIPS remain one of the main tools for inflation hedging, but they have not delivered strong total returns this year. The iShares TIPS Bond ETF, which tracks the ICE U.S. Treasury Inflation Linked Bond Index, is down 1.16% year to date as higher interest rates pressure bond prices.

Rising yields are nonetheless improving the entry point for investors. The 10-year TIPS yield is currently 2.87%, after closing at 2.951% on Oct. 5, a level not seen since November 2008.

R.J. Gallo, chief investment officer of global fixed income at Federated Hermes, says TIPS have posted losses in total return because income accruals have not been enough to offset price declines caused by higher real yields. Longer-dated TIPS also carry significant duration risk, with maturities of 10 years or more especially exposed if rates continue to rise.

Commodities and infrastructure offer alternatives

Draho says commodities can help reduce risk and improve diversification over long periods, particularly when inflation exceeds expectations. He bases that view in part on long-term asset-allocation studies that include the 1970s, when inflation was much higher.

He also highlights infrastructure assets such as roads, ports and bridges. Operators in those areas often generate long-term revenue through contracts that include inflation riders or built-in price adjustments, giving them a degree of protection when costs rise.

Draho is not signaling a broad inflation alarm, but he says adding some protection is sensible because supply-side shocks could still push prices higher again. For investors, that leaves inflation hedging as both a portfolio defense and a response to persistent uncertainty in rates and energy markets.

Our earlier coverage on the recent commodities rally explained why some strategists see commodity exposure as a longer-term portfolio allocation amid energy disruptions, AI-driven demand for key minerals, and renewed inflation concerns. The piece also cautioned against chasing short-term price spikes and suggested that investing via commodity-linked companies (such as producers and refiners) may offer a steadier way to gain exposure while maintaining diversification alongside bonds.

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