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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35383  
Subject: TIPS auction opens July 2 Date: 6/18/2009 12:38 PM
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http://online.wsj.com/article/SB124525956814123923.html


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

Investors Cut Holdings in TIPS
Pimco, Others Book Profits

By MIN ZENG

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 http://www.federalreserve.gov/releases/h15/data.htm

Inflation data is from www.bls.gov

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, which omits food and energy prices, rose 1.8% YOY.

The bond market has already discounted the effects of the oil price bubble and the probability of a long deflationary recession, since spreads are back to the normal range of around 2%.

The best opportunity in years for buying TIPS was in December 2008, during the panic, when the spread went negative for a couple of weeks. This can be seen in the first chart.

That opportunity is gone, but dumping of TIPS by big bond dealers in July 2009 provides a smaller opportunity... especially if you think that governmental monetary and fiscal stimulus will not be easily withdrawn and will lead to inflation in the future.

Wendy
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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27967 of 35383
Subject: Re: TIPS auction opens July 2 Date: 6/18/2009 12:40 PM
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DATE TIPS, Treasury Spread Inflation
10Y 10Y
Jan-03 2.29 4.05 1.76 2.8
Feb-03 1.99 3.9 1.91 3.1
Mar-03 1.94 3.81 1.87 3
Apr-03 2.18 3.96 1.78 2.2
May-03 1.91 3.57 1.66 1.9
Jun-03 1.72 3.33 1.61 1.9
Jul-03 2.11 3.98 1.87 2.1
Aug-03 2.32 4.45 2.13 2.2
Sep-03 2.19 4.27 2.08 2.4
Oct-03 2.08 4.29 2.21 2
Nov-03 1.96 4.3 2.34 1.9
Dec-03 1.98 4.27 2.29 2
Jan-04 1.89 4.15 2.26 2
Feb-04 1.76 4.08 2.32 1.7
Mar-04 1.47 3.83 2.36 1.7
Apr-04 1.9 4.35 2.45 2.3
May-04 2.09 4.72 2.63 2.9
Jun-04 2.15 4.73 2.58 3.2
Jul-04 2.02 4.5 2.48 2.9
Aug-04 1.86 4.28 2.42 2.5
Sep-04 1.8 4.13 2.33 2.5
Oct-04 1.73 4.1 2.37 3.2
Nov-04 1.68 4.19 2.51 3.6
Dec-04 1.67 4.23 2.56 3.3
Jan-05 1.72 4.22 2.5 3
Feb-05 1.63 4.17 2.54 3.1
Mar-05 1.79 4.5 2.71 3.2
Apr-05 1.71 4.34 2.63 3.4
May-05 1.65 4.14 2.49 2.8
Jun-05 1.67 4 2.33 2.5
Jul-05 1.88 4.18 2.3 3
Aug-05 1.89 4.26 2.37 3.6
Sep-05 1.7 4.2 2.5 4.7
Oct-05 1.94 4.46 2.52 4.4
Nov-05 2.06 4.54 2.48 3.5
Dec-05 2.12 4.47 2.35 3.4
Jan-06 2.01 4.42 2.41 4
Feb-06 2.05 4.57 2.52 3.7
Mar-06 2.2 4.72 2.52 3.5
Apr-06 2.41 4.99 2.58 3.6
May-06 2.45 5.11 2.66 4
Jun-06 2.53 5.11 2.58 4.2
Jul-06 2.51 5.09 2.58 4.1
Aug-06 2.29 4.88 2.59 3.9
Sep-06 2.32 4.72 2.4 2.1
Oct-06 2.41 4.73 2.32 1.4
Nov-06 2.29 4.6 2.31 2
Dec-06 2.25 4.56 2.31 2.5
Jan-07 2.44 4.76 2.32 2.1
Feb-07 2.36 4.72 2.36 2.4
Mar-07 2.18 4.56 2.38 2.8
Apr-07 2.26 4.69 2.43 2.6
May-07 2.37 4.75 2.38 2.7
Jun-07 2.69 5.1 2.41 2.6
Jul-07 2.64 5 2.36 2.3
Aug-07 2.44 4.67 2.23 1.9
Sep-07 2.26 4.52 2.26 2.8
Oct-07 2.2 4.53 2.33 3.6
Nov-07 1.77 4.15 2.38 4.4
Dec-07 1.79 4.1 2.31 4.2
Jan-08 1.47 3.74 2.27 4.4
Feb-08 1.41 3.74 2.33 4.2
Mar-08 1.09 3.51 2.42 4.1
Apr-08 1.36 3.68 2.32 3.9
May-08 1.46 3.88 2.42 4
Jun-08 1.63 4.1 2.47 4.8
Jul-08 1.57 4.01 2.44 5.4
Aug-08 1.68 3.89 2.21 5.3
Sep-08 1.85 3.69 1.84 4.9
Oct-08 2.75 3.81 1.06 3.7
Nov-08 2.89 3.53 0.64 1
Dec-08 2.17 2.42 0.25 -0.1
Jan-09 1.91 2.52 0.61 -0.2
Feb-09 1.75 2.87 1.12 0.1
Mar-09 1.71 2.82 1.11 -0.4
Apr-09 1.57 2.93 1.36 -0.6
May-09 1.72 3.29 1.57 -1


Wendy

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27968 of 35383
Subject: Re: TIPS auction opens July 2 Date: 6/18/2009 12:45 PM
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>> bought TIPS in December 2008, when the market inverted for a short time, but I have no intention of selling them for capital gains :-). <<

Same here, but in November. I loaded up on the 7/2016s and the 1/2025s, which were bring priced to yield over 2.8% real to maturity at its then-current pricing. Worst case they'd still yield over 2.5% and that's if they were redeemed at par upon maturity. I plan to hold these to maturity.

>> That opportunity is gone, but dumping of TIPS by big bond dealers in July 2009 provides a smaller opportunity... especially if you think that governmental monetary and fiscal stimulus will not be easily withdrawn and will lead to inflation in the future. <<

The question, of course, that many debate even today is whether or not all of the future inflation will be adequately captured in the CPI. I like TIPS but I also understand that the government has a conflict of interest in terms of setting the CPI. That's the main reason I don't have more TIPS than I do.

#29

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27969 of 35383
Subject: Re: TIPS auction opens July 2 Date: 6/18/2009 12:59 PM
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<The question, of course, that many debate even today is whether or not all of the future inflation will be adequately captured in the CPI. I like TIPS but I also understand that the government has a conflict of interest in terms of setting the CPI. That's the main reason I don't have more TIPS than I do.>

I worry about this, too, especially because the BLS is already working on a new "alternative" CPI that understates inflation even more.

Wendy

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27995 of 35383
Subject: Re: TIPS auction opens July 2 Date: 6/21/2009 5:28 PM
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Wendy

The best opportunity in years for buying TIPS was in December 2008, during the panic, when the spread went negative for a couple of weeks.

NOW you tell me!

brucdoe

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27999 of 35383
Subject: Re: TIPS auction opens July 2 Date: 6/22/2009 10:08 AM
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NOW you tell me!

IIRC, she told us (along with others) then too :-)

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28005 of 35383
Subject: Re: TIPS auction opens July 2 Date: 6/22/2009 1:13 PM
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<NOW you tell me!>

I told you then! I wrote a bunch of posts about TIPS and the market reversal in December 2008.
Wendy

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28008 of 35383
Subject: Re: TIPS auction opens July 2 Date: 6/22/2009 3:49 PM
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Wendy

Oops! I must be twins. No one person could be so careless.

brucedoe

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Author: imuafool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28009 of 35383
Subject: Re: TIPS auction opens July 2 Date: 6/22/2009 5:05 PM
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I have just looked at 10Y TIPS and Treasuries, from 1/2003 through 5/2009.
I suggest that you chart the TIPS and Treasuries together on one chart, and the TIPS/Treasuries Spread and inflation together on another chart.

Wendy

====================================================================

Thanks to Professor Mark Perry, except for the time period (Jan04-Jun09), here are the charts that Wendy suggested:

http://mjperry.blogspot.com/2009/06/chart-of-day-tips-derive...

A few charts show and tell it all quite vividly...the tracking lines and the buying opportunity for TIPS at the end of 2008.

With that opportunity gone, according to Perry:
the Treasury market seems to have stabilized, and the bond market's 10-year expectation of inflation is back around 2.5%, consistent with the inflationary expectations from 2004-2007.

Ray

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28014 of 35383
Subject: Re: TIPS auction opens July 2 Date: 6/23/2009 9:02 AM
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A few charts show and tell it all quite vividly...the tracking lines and the buying opportunity for TIPS at the end of 2008.

With that opportunity gone, according to Perry:
the Treasury market seems to have stabilized, and the bond market's 10-year expectation of inflation is back around 2.5%, consistent with the inflationary expectations from 2004-2007.


I guess I fail to see the point of all this, unless people are interested in playing the TIPS versus Treasuries market for momentum trading.

Go back to basics.

Presuming your savings and investment strategy calls for some allocation into low default risk vehicles (TIPS, Treasuries, government insured CDs), the question at any time you have money to allocate is which of these vehicles is likely to produce the best return, factoring in taxes, maturities, liquidity, etc. Whether CPI-U reflects personal inflation is a non-issue, unless you mistake CPI-U for personal inflation in guessing what inflation will be until TIPS mature. What traders are factoring in is pretty much irrelevant, because the market is always wrong and traders are neither interested in long term realities (just in what other traders are doing) nor do they have a clue about macroeconomics.

For those simply interested in the best "safe" choice, the question with TIPS is whether the fixed yield is sufficiently high relative to other choices that the x-factor for CPI-U adjustment suggests at any given time they are what to choose. The highest fixed yields since about 2001 have at best been slightly above historical average for 10 year Treasuries over CPI-U (in other words, peaks have been well below historical averages for peaks). Most of the time there have been CDs available that have seemed better choices, especially with TIPS fixed yield much of the time well below 2%. For July TIPS, it may be a toss-up, but I'd probably prefer a 5-year CD to a 10-year TIPS at current rates (with the option of cashing out the CD for a penalty if rates go up).

Personally, I am willing to choose TIPS even if my guess for CPI-U adjustment is a little lower than CDs, if the rate is above 2.25%.

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Author: Brustpjf Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28150 of 35383
Subject: Re: TIPS auction opens July 2 Date: 7/7/2009 11:58 AM
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The best opportunity in years for buying TIPS was in December 2008, during the panic, when the spread went negative for a couple of weeks. This can be seen in the first chart.
That opportunity is gone, but dumping of TIPS by big bond dealers in July 2009 provides a smaller opportunity... especially if you think that governmental monetary and fiscal stimulus will not be easily withdrawn and will lead to inflation in the future.


Thanks for the TIPS tip, I will look into this right away!

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