While the smoke was still on the rise, OPEC+'s decision to increase production after my article last week made those who had a position on the selling side of oil quite happy. The story here is actually a story that starts with a visibly increasing supply and can go all the way to a decrease in inflation in the US in the future. For now, if we look at the oil front, I think we will see a 10% - 15% decrease in price in the coming months.
However, there is a subject that caught my attention in the options market; while the number of open positions in short-term put options is higher than in call options, as the terms open, the open positions on the buying side increase. In other words, the market is evaluating the possibility that oil may still go up in long-term terms. But we should not consider this as a very important issue, because in the oil market, which is traded with monthly terms, investors can change the situation by immediately making new pricing in the contract renewed at the end of the term according to the current conjuncture. What we need to pay attention to is that the options market is currently pricing the downside.
After the Trump-Vance duo cornered Zelensky last weekend, the European defense industry stocks continued to rise with European leaders supporting Ukraine. I can say that stocks rose by 16% on Monday. Right now, the agenda of the US markets is once again occupied by the issue of growth. But the inflation story that has been told for a long time is not over. In fact, as an indicator of this, I would like to talk about a security that the market uses to protect itself from inflation and at the same time to park money in a safe place: inflation-indexed bonds (EET).
The difference between EETs and traditional bonds is that the amount of the principal that will be paid back to you at the end of the term increases according to inflation. In a standard bond, you receive the last coupon payment, if any, and your nominal principal at the price of 100 at the end of the term. However, in EETs, you receive whatever your principal has become with inflation.
These types of assets, which are mostly used as protection against inflation and preferred by investors in inflationary environments where large amounts of capital gains are not expected, have recently become one of the asset classes that attracted the most money inflows in the US. Although there was an outflow of $37.2 billion in the 2022/23 period - because there was an outflow from all kinds of bonds when the Fed raised interest rates at that time - there has been an inflow of $150 million into EETs in the US since the beginning of the year, according to Morningstar data.
Indeed, when we look at the EET exchange-traded fund (ETF) traded in the US and known by the short name TIP, we can see that it moves in one-to-one harmony with the inverse of the inflation-adjusted 10-year interest return, that is, with the bond in question. This means that if an investor who is worried about high inflation in the US market wants to protect their assets against inflation, TIP or short-term EETs can be good investment alternatives.
Thinking like this may make life easier to visualize the scenario; Let's say you are the owner, CEO or CFO of a company that has dollars in its treasury that you have not invested. According to the company rules, you cannot invest this money in risky places such as stocks. In this case, all you have is the Eurobond market or DTH account. However, in this case, you are still open to inflation risk and you are not sure that you can protect your company's foreign currency assets. This is where inflation-indexed bonds come to your rescue.
Of course, life is not easy again, because there is also a tax dimension to the matter. Let's say you bought a 5-year EET and at the end of each year, these were valued according to current inflation, as a result, your principal value increased, but you have not sold the assets yet. Despite this, according to US law, you are charged tax due to the increase in value and you are expected to pay it. It is offset at the last sale or redemption. Well, perhaps the best choice to avoid having to deal with the tax office of that country would be to prefer ETFs consisting of short-term EETs.
The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.
