SCHP - SCHP: Inflation Expectations Have Retreated Upgrading To Hold

2023-04-04 13:51:51 ET

Summary

• The final Fed rate hike may come sooner rather than later.
• Inflation expectations have eased as recent CPI and PCE data have been more tame.
• Given the less sanguine sentiment, I'm upgrading SCHP to a hold from a sell as risks appear discounted.

Bonds are boasting a decent return so far in 2023. Easing inflation fears and jitters about a looming U.S. recession are two factors causing investors to return to the relative safety of fixed income. The TIPS market has cooled, though, as the Fed’s war on inflation appears to be in the later innings. The final Fed rate hike is likely to come over the coming months.

Given all that, I notice that the Schwab U.S. TIPS ETF (SCHP) has bounced sharply off its late 2023 low and is on the verge of a technical breakout. Of course, it is proper to measure a TIPS fund to a comparable-duration nominal Treasury ETF. In this case, SCHIP is simply performing similarly to IEF, the 7-10 year Treasury fund. So, owning TIPS has not featured the benefit it did from 2020 through early 2022.

TIPS And Nominal Treasuries Trading Together Lately

What’s more, this year’s decline in TIPS yields is not something investors want to see. While it means short-term price appreciation, income investors are now earning less (above the expected inflation rate) compared to the end of 2022. Still, real yields easily above 1% are much better than what was seen two years ago.

TIPS Yields Have Declined YTD

Digging into SCHP, I assert that it is an ideal choice to get TIPS exposure since it has a very low expense ratio of just four basis points. For background, the fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index composed of inflation-protected U.S. Treasury securities. It invests in the overall maturity spectrum of the domestic TIPS market, according to Schwab .

Morningstar data show that it’s indeed a high-quality, medium-duration fund with all assets in Treasury securities. It is also a gold-star-rated product by the research firm for its tradeability and low cost compared to other TIPS funds. The duration is about 7 years and its assets under management are high at $12.5 billion. Volume is also robust at more than 2 million daily.

SCHP Portfolio Profile

SCHP Maturity Profile

Checking in on seasonality, data from Equity Clock show the SCHP tends to perform well now through early August before a sideways range ensues through Q4 and early in the year. So, there are some near-term tailwinds here for those trading the ETF.

SCHP: Bullish Seasonal Trends Through Early August

The Technical Take

With positive seasonality, low costs, and favorable tradeability metrics, the technical picture is also on the mend. Notice in the chart below that shares are right at a critical point – the falling 200-day moving average. With support just above $51 and resistance in the $53 to $54 zone, a move above $54 and the 200-day would imply a bullish measured move price objective to just below $57, which is the previous range from last summer.

Back then , I had a sell rating on the fund given trends in the inflation expectations market, but I now see those trends as reaching a supportive point, so SCHP is a better risk/reward. I am upgrading it to a hold, and a rally above $54 would be a near-term bullish catalyst as we near the next FOMC meeting.

SCHP: Shares Nearing A Bullish Breakout After Basing

The Bottom Line

I have a positive view of SCHP as an ideal way to play the TIPS market, and the fund is near a key spot on the chart. With the trend nearly reversing, I’m upgrading SCHP from a sell to a hold.

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