Trading patterns suggest that much of the money that’s fled floating-rate notes has gone into ETFs owning inflation-protected securities, which gained a record $1.5 billion this month.

Policy makers viewed their July cut as, in part, insurance against too-low inflation, minutes from the central bank’s meeting show. Price gains have stubbornly remained below the Fed’s 2% target for years, despite strong employment and consumer-spending data, but further rate cuts could turn the tables.

“It’s not surprising,” Candice Bangsund, a portfolio manager at Fiera Capital, which is betting on TIPS, said of the ETF influx. “It ties into that theory that inflation expectations are much too low. There’s very little regard for the fact that inflation is actually moving higher.”

But investors still risk jumping the gun. While traders have boosted expectations for further rate cuts, Fed Chair Jerome Powell described lower rates as a “mid-cycle adjustment” and rejected the idea of a return of looser monetary policy unless the economy weakens drastically.

Meanwhile, the Fed’s preferred measure of inflation showed signs of rebounding in June. Data for July is slated to be released on Friday and at least some investors are betting it could continue its upward trend, mitigating the need for further rate cuts. Floating-rate notes now look cheapto Pacific Investment Management Co., which believes that the market’s expectations for further easing are too high.

Still, with the rotation underway, it could take more than one piece of economic data to roll back the tide of cash that’s on the move.

“What happens when we get these volatile markets like we’ve seen, you see investors moving, you see fund flows moving,” said Chris Gaffney, president of world markets at TIAA, who says investors are being more defensive. “Could they change? Certainly. If we get really good news on the trade front, it could change.”

— With assistance by James Seyffart, and Tom Lagerman. This article was provided by Bloomberg News.

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