Vanguard is monitoring an unusual crack spread and fears that US inflation will be more stubborn than expected, accelerating its purchase of inflation-hedging bonds.
Vanguard is monitoring the crack spread, the price difference between crude oil and refined oil, after it surged to its highest level in over three years. They fear this could trigger prolonged, unexpected inflation in the United States, potentially leading to a surge in bond purchases to hedge against inflation.
On July 10, 2569 at 14.15:XNUMX p.m., Bloomberg News reported that Vanguard Asset Management has begun monitoring unusual movements in the crack spread, or the price difference between crude oil and refined petroleum products. This widening gap has reached its highest level since 2565, despite falling crude oil prices, raising concerns that U.S. inflation may persist longer than market expectations.
Ales Koutny, Head of International Interest Rates at Vanguard Active Funds. said Normally, the crack spread is not an indicator that bond market investors pay much attention to, because oil product prices tend to move in line with crude oil prices. However, the situation has changed significantly recently.
Although crude oil prices fell following the ceasefire agreement between the US and Iran, the prices of gasoline, diesel, jet fuel, and fuel oil declined much less, resulting in an unusually widening crack spread.
Koutny specify that Vanguard's investment team has never tracked these figures as closely as it does now, because if that spread doesn't return to normal, it could reflect high fuel costs and translate into broader inflation.
One of the key factors contributing to the surge in crack spreads is the impact of conflicts in the Middle East, which led to reduced production at oil refineries worldwide. Simultaneously, Ukraine's attack on Russian refineries resulted in the Russian government banning diesel exports, leading to higher refining margins.
Vanguard believes the key question is whether this price spread will return to normal or become a new structure in the energy market, which could cause inflationary pressures to linger in the economy longer than investors anticipate.
Currently, the 2-year breakeven inflation rate of U.S. government bonds, which reflects market inflation expectations, has fallen to near its lowest level in almost two years. This indicates that most investors believe inflation will return to near the Federal Reserve's (Fed) 2% target within the next two years.
However, Vanguard takes a different view, believing the market is underestimating the risk of inflation. Therefore, it is increasing its investment in both short-term Treasury Inflation-Protected Securities (TIPS) and long-term breakeven inflation-based securities to hedge against prolonged periods of high inflation.
In addition, Vanguard's investment team is in the process of refining its inflation analysis model by incorporating the prices of refined petroleum products, such as diesel and jet fuel, alongside crude oil prices to more accurately assess inflation risk.
Meanwhile, President Donald Trump's doubts about the sustainability of the ceasefire agreement with Iran caused oil prices to rise again this week.
Currently, financial markets still expect the U.S. Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BOE) to each raise their policy interest rates by another 0.25% by the end of this year, and possibly further increases this year or next, although these expectations have begun to ease since the outbreak of the U.S.-Iran conflict in March.
refer : www.bloomberg.com
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