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.
Here is the chart of the iShares Barclays TIPS ETF for today:
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:
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.