The Motley Fool Discussion Boards

Previous Page

Investing/Strategies / Bonds & Fixed Income Investments


Subject:  TIPS auction opens July 2 Date:  6/18/2009  12:38 PM
Author:  WendyBG Number:  27966 of 36525

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, 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.

Copyright 1996-2018 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us