Vanguard Asset Management has increased its investments in short-dated inflation-protected Treasuries and is adjusting its risk models due to concerns about persistent U.S. inflation. The firm's active funds team initiated a long position in short-dated inflation-protected Treasuries.

Vanguard's team has also combined its position in short-dated Treasuries with breakeven trades further along the yield curve. The firm is modifying its models to incorporate individual oil distillates, in addition to crude oil, for assessing inflation risk.

Ales Koutny, head of international rates at Vanguard's active funds, stated that the financial climate exhibits deviations. "The question is whether the spread will normalize, or will the low correlation become a more structural feature which could impact inflation risks," Koutny said. He added, "These deviations could affect both sides of the argument, and this could be quite significant."

The two-year breakeven rates have decreased to nearly their lowest point in almost two years. This level suggests market expectations for inflation to remain slightly above the Federal Reserve's 2% target. The crack spread, which indicates the price difference between refined fuels and the crude oil used in their production, reached a 2022 high.

Fuel production at global refineries decreased due to the Iran war. Additionally, Ukrainian attacks on Russian plants led Moscow to prohibit diesel exports. While crude prices have declined since the U.S.-Iran ceasefire, gasoline prices have not experienced a proportional drop. Jet fuel, diesel, and fuel oil are showing different behaviors in relation to oil prices.