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No. of Recommendations: 5
<I wonder why they would enter the TIPS market? Apparently they don't read this board and consider their price point very seriously.>

The Chinese have invested billions of their trade surplus dollars in regular Treasury bonds. That helped force yields lower. However, the Chinese continued to buy Treasuries (among their many other investments, including commodity producers, internal infrastructure, etc.). They didn't seem very sensitive to the yield.

http://www.martincapital.com/chart-pgs/Pg_mmnry.htm

Within the past few months, the Chinese began to express concern about the huge amount of dollar monetary creation due to the crisis. They started to worry publicly about possible future inflation. It was in this small article that they announced their intention to buy TIPS.

The quantity of TIPS is much lower than Treasuries. Shortly after the Chinese announcement, the TIPS yield started to drop. I don't think this is a coincidence.

Many financial commentators have observed that the Chinese are fairly insensitive to yield.

Personally, I am disappointed by the entry of this 800 pound gorilla into the small TIPS market. I wish the rates would go back to their average of 2ish%.

http://research.stlouisfed.org/fred2/series/WFII10

I bought TIPS in December 2008 when the TIPS yield was higher than the Treasury yield (as if deflation would stick around for 10 years!). The TIPS I bought in December 2008 yield 6.3% (plus inflation). Talk about a panic!

Although I am disappointed about the low yield from TIPS, and I'm not buying right now, I still think that they are a better buy than Treasuries.

The 10Y Treasury yields 3.53%. The 10Y TIPS yields 1.24%. This is an implied 10 year inflation rate of 2.29%. That's pretty much the pre-crisis difference.

Is that reasonable? Will inflation over the next 10 years be only 2.3% per year?

That is a Macroeconomic question. A lot depends upon whether the U.S. falls into a Japan-like lengthy recession or recovers.

Wendy
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