Provocative post: Is it time to short TIPS?

Personally, I am not going there. I don’t short, that’s not my style, and I definitely don’t feel I could accurately predict the future trend of TIPS mutual funds and ETFs, although I don’t own any at the moment and have repeatedly pointed out that mutual funds investing in TIPS are riding near 5-year highs.

So along comes The Inflation Trader blog on SeekingAlpha.com with a post titled, ‘Don’t count Bill Gross out just yet.’ (Not that I would ever count Bill Gross out. … Come on.)

Inflation Trader, I will just call him IT, points out that bonds had a big selloff on Tuesday, and that also affected TIPS, by the way. Since I am following the 30-year TIPS to be auctioned next week, I was interested in this development Tuesday:

That 30-year yield took a very nice leap upward on Tuesday, and anything getting it closer to 2% would make next week’s 30-year TIPS auction a lot more appealing. But the point is, Tuesday was not kind to Treasuries. (Wednesday was another matter, and I will write about that tomorrow.)

Back to IT, who writes:

Maybe bond guys just realize that if all of this bad news is in place, and not many folks are expecting a cheerful resolution from the Greek crisis, there are few reasons for Treasuries to rally further. … I also wonder if it is time to be short TIPS.

IT wrote this before Wednesday’s inflation numbers, which were a little worse than expected, so that counters (somewhat) the rest of his argument, which includes:

A small miss lower on CPI will not change the fact that the overall trend is upward, but it would serve to reduce the fear premium currently embedded in TIPS. A miss higher would keep that fear premium stable or even increase it a little bit, but that would probably be in the context of rapidly rising rates overall.

My point is that there is an anti-TIPS sentiment brewing, versus the overwhelming  pro-TIPS sentiment of the last several months. This is a lot more important for people who invest in TIPS mutual funds and ETFs. It is less important for people – like me – who invest in TIPS and hold them to maturity.

But what about that 30-year TIPS auction next week? Time to ponder.

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One Response to Provocative post: Is it time to short TIPS?

  1. TIPSwatch! I didn’t know about this blog. You are doing a great service to your readers. I need to add this to the IIIA website (Inflation-Indexed Investing Association).

    Just a quick disclaimer – I have been saying for a very long time that TIPS to your investment horizon should be the risk-free security rather than T-Bills, since the latter have inflation risk. (And I have written academic papers about TIPS, including this one entitled “Maximizing Personal Surplus: Liability-Driven Investment for Individuals” at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1699347 . I was also bullish on TIPS throughout the spring despite low yields, because the Fed was buying all net supply and there was evident end-user demand on top of that.

    So to be clear, I’m no ‘hater’ (read my other comments to see this!). My comment on Tuesday is more about valuation. I think there will be a better time to buy TIPS, and once the 10y is above 1% or 1.25% and the 30y is above 2% or 2.25% I will be actively recommending them again.

    IT

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