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Today's Wall Street Journal: "...the real reason long-term Treasurys rallied is they have become despised as an asset class. [so slightly lower-than-expected inflation news caused a bounce.]

... just about any survey of sentiment indicates bearishness toward bonds. Primary dealers -- the firms that deal directly with the Federal Reserve -- are, on balance, betting against the 10-year Treasury note...

...most Wall Street economists expect long-term rates will be higher in six months. In another sign of bearishness on long-term bonds, professional bond managers surveyed by ISI Group show a marked preference for short-term Treasurys."

http://online.wsj.com/article/SB114255695641600784.html?mod=mkts_main_featured_stories_hs

I am still deciding whether to buy TIPS, at the April auction. The yield of both the 5 and 10 year TIPS has risen, recently, to 2.01% and 2.15%, respectively (the principal is inflation-adjusted). This is still well below the 50-year average of "real" (inflation-adjusted) rates, on long bonds.
http://www.martincapital.com/chart-pgs/CH_mmnry.HTM

The inflation differential (the difference between the regular T-Note and TIPS yield) has dropped, over the past couple of weeks (to 2.61% and 2.52%, respectively).

Thoughts?
Wendy



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Wendy,

I think you're oversimplifying. Yes, over the last few days, the inflation differential has dropped, but it went up after then high inflation number for January by at least 30 basis points for 5-years, and if I remember right it was briefly below 2.3% on 5 or 10 years when CPI-U took a nose dive a few months ago. Both 5 and 10 years have hovered in the 2.4%-2.6% range for most of the last couple of years, since I started watching, with the occasional spike or drop off.

The current real return on TIPS is low by historical real return standards, but not dramatically low (a year ago, 5 year TIPS were less than 1% above inflation). As 2Old showed us, real return on Treasuries, and even Fed Rate, are volatile, so average isn't any more meaningful than average return on a stock index.

We've been hearing predictions that long bond yields, meaning real return, will go up for a while now (except from tose who predict they will go down). So far, there has been enough money out there to service debt and keep rates low, and I don't see anything to change this in the medium term, though there are lots of things that could happen to drive yields on direction or the other. I do continue to believe at some point debts have to be paid and when the SS surplus stops subsidizing the national debt some of the free cash will be gone, but that's not going to happen until after the next prsidential election.
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We've been hearing predictions that long bond yields, meaning real return, will go up for a while now (except from t[h]ose who predict they will go down).

_________*,*______________

The crystal tennis shoe tells me that as the refinancing slows, more money will want to go out longer. There will not be as much need on the short end of the curve and folks will be tied up, and willing to stay tied up a little longer. With more money chasing the longer bonds, the price pressure will be keeping them yields down. So I do not see long end yields going up more than about 25-50 bp. (relatively above the short end.) Not that this is a big revelation given the history of the yield curve. I do see a little bump coming on the short end, maybe to around 4.75-4.90% (the 6 month holding fairly steady, but the 1-2 year area coming up to the 4.90% and the long end maybe up to 5.50%

But the kicker for me is than I see inflation poking its little head and at 5.50% long term it does not favor non-inflation instruments.

DrTarr



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