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Author: TMFKGOMalley Big gold star, 5000 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: T-Bills on Morningstar Date: 10/24/2002 8:58 AM
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Hi,

I thought this article was interesting (requires free registration):
TIPS: Is The Party Over?
http://news.morningstar.com/doc/news/0,2,82054,00.html


"The inflation-indexed nature of TIPS is what makes them so exciting as a long-term investment. The fact that TIPS coupons (and therefore their yields) are meant to be a reflection of real yields, however, appears to be what's driven their short-term returns over the past couple of years, in particular.

The main reason is that despite the drop in inflation expectations over the past couple of years, those expectations haven't fallen nearly as fast as have Treasury-bond yields. The part of a conventional Treasury bond's yield that's meant to compensate for inflation has changed very little, while the rest of its yield--or its real yield--has fallen dramatically. That, in turn, has helped fuel the big rally for TIPS. Why? Because the TIPS market pays close attention to the conventional Treasury market, and the fall of real yields--to which TIPS are tightly tied--has a dramatic effect on TIPS prices. It's hard to pinpoint exactly what's driven the fall in real yields, but the bear equity market and the concurrent flood of money into Treasury bonds (thereby driving up their prices, and driving down investors' demand for high real yields) are likely culprits."

Keith O'Malley
TMF KGOMalley
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