So Standard & Poors issues a negative outlook on U.S. Treasuries this morning, and the stock market falls into turmoil. The Dow average ended up rallying to close at -1.14% for the day. (In reality, that is a non-event, isn’t it?)
But you would expect some shakeup in Treasury issues. A negative outlook should mean the risk premium rises, and that means higher interest rates.
Wrong.
Here is the chart of the iShares Barclays TIPS ETF for today:
One-day chart for TIP ETF
The news wasn’t greeted well in the morning, but by the end of the day this ETF managed to squeak out a 0.3% gain. Impressive.
For the record, I am not high on this TIP ETF at these levels. Here is the five-year chart, and my advice is … don’t get excited when your investment hits a five-year high, especially an investment that is completely controlled by monetary policy:
5-year chart fot TIP ETF
The bigger immediate issue is the 5-year Treasury Inflation-Protected Security that will be auctioned Thursday. It is likely to go off at a negative base interest rate, something in the range of -0.25% best case to -0.7% worst case. (But the principal will rise with the inflation rate over the next five years.)
Here are the rates I am finding today on Barrons.com:
First of all, note that all these issues were positive today. The closest to a 5-year TIPS issued this week is the July 15 2016 issue, which has a base yield of -0.306%. But the issue one year earlier is yielding -0.693%.
It is all going to come down to demand on this week’s auction. If there is heavy demand — and I wonder about that with today’s positive move — then how negative will the yield go?
Conclusion: Still looks iffy on this issue. A negative base yield doesn’t appeal to me. However, if the cash is in a money market account, the inflation-adjusted rate of 2.5% to 3.0% does look a little more attractive.
My mind has been wandering to municipal bonds — but safety is more of an issue there.
If you have thoughts, please post them. I’d love to start a discussion about this week’s 5-year TIPS issue.
Treasury Inflation-Protected Securities 
Fidelity still estimates the 5 year auction to go at 102.361 with a nominal interest rate of 0.125%. Based on the current yield of 2.2% for the 5 year treasury note, an inflation rate of 2.68% would be needed to break even.
The video posted on this blog with George Concalves was very interesting. He believes commodities (food, gas etc.) don’t drive inflation but act more as a “tax”. According to him, the main inflation driver is wages which he expects to remain stable. Since commodities are part of the CPI-U, I would like to see the math that supports this conclusion.
In a related note, a WSJ web article said curbing inflation is China’s top monetary focus.