Threat to TIPS greatly exaggerated?

Richard Leong of Reuters has posted an opinion piece on Treasury Inflation-Protected Securities titled, “Fed’s QE2 end threatens inflation bond rally.”

Leong notes that “Barclays’ TIPS index is up 5.20 percent year-to-date, compared with a 2.62 percent rise on its Treasury index.” He says some analysts fear that the end of quantitative easing will mark the end of the TIPS rally.

TIPS earned a paltry 0.31 percent return in May, worst month since January. This compares with a 1.56 percent gain on regular Treasuries, according to Barclays Capital.

Some believe the recent weakness in TIPS is a precursor of more to come. Last month’s sell-off in commodities has cooled inflation expectations and demand for these investments as a hedge against rising prices.

But he adds, “the death of the TIPS rally may be greatly exaggerated” and notes that core inflation will trend higher the rest of this year.

TIPS perform well – in general – when inflation is rising gently and interest rates are stable. That is the ‘Goldilocks scenario’ for TIPS, not too hot, not too cold.

But as Bill Irving, manager of the Fidelity Inflation-Protected Bond Fund (FINPX) has pointed out, it is hard to see TIPS yields falling much below current levels.

(But, I admit, I have said that many times before and I have been wrong.)

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One Response to Threat to TIPS greatly exaggerated?

  1. Lorenza says:

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