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Investors rush to buy inflation protection - BOfA

By Reuters

By Julien Ponthus

LONDON (Reuters) -Investors are loading up on inflation protection, while starting to grow more cautious on rate-sensitive tech stocks as fears grow of a price uptick that may force the U.S. Fed to bring forward policy tightening, BofA’s weekly data showed on Friday.

During the week to May 12, Treasury Inflation-Protected Securities (TIPS) funds saw the largest inflow in 23 weeks, taking in $1.9 billion, BofA said, citing EPFR data on fund flows.

At the same time, equity funds dedicated to interest rate-sensitive tech stocks saw their first outflow in five weeks, albeit only $17 million.

Typically, the premium investors are willing to pay for these so-called growth stocks, shrinks during a economic rebound when inflation and interest rates rise.

So far in the second quarter of 2021, the Nasdaq index, home to fast-growing tech companies has been roughly flat, underperforming the S&P 500 where “cyclical” companies such as banks and travel firms have posted strong earnings.

Benchmark 10-year Treasury yields have nearly doubled since the beginning of the year, rising from 0.9% to a high of 1.77% at the end of March before retreating to about 1.65% this Friday.

“2020 marked (a) secular low point for inflation and interest rates”, the BofA note read, arguing that 2% ceiling for U.S. inflation in the was past 10 years could now be considerd as a new floor.

On Wednesday, data showed U.S. consumer prices increased by the most in nearly 12 years in April as booming demand amid a reopening economy pushed against supply constraints.

All in all, equity funds saw $25.7 billion in inflows, while $13.6 billion went into cash and $6.9 billion went into bonds, BofA said.

(Reporting by Julien Ponthus; Editing by Dhara Ranasinghe)