Global Yield – A Stellar Inflation Hedge
February 21, 2018
One of the primary sources of asset returns is a differential in the rate of change (ROC) of the Producer Price Index (PPI) minus the Consumer Price Index (CPI). The 12-month ROC in PPI-CPI in 2016 was only -0.2%, which was a dramatic rise over the -3.4% recorded in 2015 when the PPI declined -2.7% and the CPI rose only 0.7%. Since 2016, the PPI has soared to 3.9% with the CPI at 2.7% with PPI-CPI 1.3% as total returns for the Dow Jones Global Yield Index (Global Yield) has outperformed the Reuters/Jefferies Commodities Index (CRB) and the Barclays U.S. Aggregate Bond Index (U.S. bonds).
Investors are forward looking. They anticipated a higher inflation trend in 2016 and beyond by favoring inflation hedges such as Global Yield and the CRB over U.S. bonds to fuel total returns of 3.1% for global yield and 0.6% for CRB with U.S. bonds losing -1.2% since 2016 (Figure 1).
Figure 1. PPI Greater Then CPI – Inflation Rises – Dec 2015 to Feb 16, 2018
Highlights - (Figures 1 and 2 end Feb 16, 2018)
- Since Dec 2015, global yield has a higher total return than two popular inflation hedges; namely commodities and global stocks at 144.9% (global yield) versus -41.7% (commodities) and 22.7% (global stocks). U.S. bonds returned 6.5%.
- U.S. bonds bested inflation hedges when CPI plunged in 2008-2009. They have underperformed as CPI has climbed since the end of 2015 (Figure 2).
Figure 2. CPI and Global Yield Performance – Jan 2006 to Feb 16, 2018
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