Lyxor’s US Treasury inflation-protected securities (TIPS) ETF saw the second largest inflows across all ETFs listed in Europe last week, a sign investors are predicting a dramatic return of inflation.

According to data from Ultumus, European investors took out protection against inflation by pouring $321m into the $2.7bn Lyxor Core US TIPS UCITS ETF (TIPU) in the week to 26 June.

It is not only European investors who are making big bets on inflation’s comeback. According to the Bank of America (BofA), investors piled $2.6bn into TIPS in the week to 24 June, the biggest amount on record.

Rapid central bank stimulus combined with the return out of lockdowns imposed across the globe are the reasons why investors are concerned about a sudden spike in inflation.

The Federal Reserve was quick to respond to the coronavirus turmoil by implementing “unlimited” quantitative easing measures to protect US businesses from collapse.

Highlighting this, the US central bank rapidly expanded its balance sheet to a record $6.4trn by the end of March, up $2trn from the start of the month. It currently totals above $7trn.

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Simon King, CIO at Vermeer Partners, a UK wealth manager, predicted inflation would “inevitably” return if there is no withdrawal of liquidity from central banks due to the fiscal stimulus set to be implemented by governments.

“We are entering a critical phase for how governments construct and implement further fiscal stimulus,” King continued. “In the longer term, our views have not changed in that we expect supply in the global economy to recover quickly i.e. in a V shape but that due to high levels of unemployment for demand to be more of a U shape.

“This will initially keep a lid on inflation but eventually as the two sides of the economy equalise, and assuming that there has been no meaningful withdrawal of the previously mentioned liquidity, then inflation must inevitably return.”

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