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Subject:  TIPS auction opens July 2 Date:  6/18/2009  12:38 PM
Author:  WendyBG Number:  27966 of 35576

Wall Street Journal, JUNE 17, 2009, 1:54 P.M. ET

Investors Cut Holdings in TIPS
Pimco, Others Book Profits


NEW YORK -- U.S. government debt that helps investors hedge against inflation is losing some of its shine in the short term as many institutional investors cut their holdings on the view that the recent rally was overdone....

Some investors and traders unwound part of their TIPS holdings amid recent chatter that the Fed may start raising interest rates at the turn of the year and begin to phase out its massive monetary stimulus. Such a move would help keep inflation at bay, denting the need for using TIPS as an inflation hedge.

Fed officials have recently moved to squash such expectations, emphasizing the weakened state of the economy and the lack of price pressures -- yet the damage has been done in the TIPS market....
[end quote]

I'm pleased by this, because if short-term traders are still dumping TIPS on July 2, the fixed rate will be higher. I buy TIPS for the long term, not to trade. I bought TIPS in December 2008, when the market inverted for a short time, but I have no intention of selling them for capital gains :-).

I have just looked at 10Y TIPS and Treasuries, from 1/2003 through 5/2009.

Market yield data is from

Inflation data is from

I will post the data set in the following post. I suggest that you chart the TIPS and Treasuries together on one chart, and the TIPS/Treasuries Spread and inflation together on another chart. I used the monthly data because that's how the BLS reports inflation. It also helps to smooth out the noise in the bond yields.

TIPS, 10Y 10Y Treasury Spread Inflation
Min 1.09 2.42 0.25 -1
Max 2.89 5.11 2.71 5.4
Avg 1.99 4.19 2.19 2.82
StDev 0.35 0.58 0.49 1.33

The first thing that jumps out is that the bond market has consistently and significantly underestimated the inflation rate, as calculated by the Treasury - TIPS spread.

Inflation has had more variation than expected, due to the oil price bubble of 2008, followed by the bursting of the oil price bubble and the recession in late 2008 - 2009.

According to the BLS, the deflation reported in May and June 2009 is all because of the drop in energy prices YOY. The "core" CPI, whi