If you read investment commentary (it’s hard to avoid, isn’t it?) you surely have seen the rash of stories in 2012 predicting a long-term bear market for traditional Treasuries and their mutant offshoot, Treasury Inflation-Protected Securities. Examples:
- April 27, Kiplinger: Treasury Bonds: A Lousy Deal
- April 18, CNN: Here comes the bear market for bonds
- April 8, Business Insider: Is The US Treasury Market About To Mint A Fresh Generation Of Idiots?
- March 20, Seeking Alpha: Are Bond ETFs Finally In A Bear Market?
I’m not criticizing this train of thought, in fact, I pretty much agree with it. Since the middle of 2011, with massive Federal Reserve intervention in the Treasury market and a boiling economic crisis in Europe, interest rates on traditional Treasuries and TIPS have fallen to all-time lows. Those rates can’t be sustained.
I have been saying that for several months. And I have been wrong.
Here’s the way TIPS have performed in 2012, represented by the widely held TIP ETF:
The TIP ETF closed Friday at 119.54, just pennies off the all-time high of 119.77. Yields to maturity for TIPS are now negative (before the inflation adjustment) all the way up to 2025 Jan 15, nearly 13 years into the future. And this is happening at a time when:
- Inflation is slowing, dropping to 2.7% for the 12 months ending in March.
- The Federal Reserve is winding down ‘Operation Twist’ to force down long-term rates and is not committing to a new round of easing.
- The stock market has soared, slumped and then recovered, leaving the S&P 500 with a year-to-date return of 11.86%.
- The European crisis has stabilized – at least temporarily.
TIPS, so far, have a bit of a ‘safe-haven’ status in the Treasury world. The inflation protection gives them appeal to investors even when their base rates fall into the negative. Look at how the TIP ETF has performed this year versus TLT, the long-term Treasury ETF:
So far, TIPS are the Energizer Bunny of bond investments, they keep going and going. It’s reasonable to expect this long-term, massive move upward will eventually break. But it isn’t happening yet.
What to expect from here? In a New York Times analysis, Jack Duff speculated that the strong run in TIPS could prove to be a loser for future investors:
“TIPS have gone through a period where just about everything has gone right for them,” said Robert Johnson, director of economic analysis at Morningstar. “Now the situation has changed, and they are looking quite expensive.”
But that analysis was written in July 2011, the dawn of a huge surge in TIPS. At the time of the article, the TIP ETF closed at 109.30 and today stands at 119.54, a 9.3% gain since the New York Times article appeared.
Here are some more-recent thoughts from Jeffrey Kosnett’s Kiplinger article I cited above:
Bond markets do not turn around instantly and aren’t vulnerable to a flash crash, as the stock market has shown it is. Pessimists often spin the widespread ownership of Treasuries by people and institutions around the world as a reflection of our dependency on foreign money. But I see the global affection for Treasuries differently: I think it shows that every nation on earth has confidence in the U.S. as a place to keep reserves. But those investors, no matter where they are located, will gradually demand to be paid better by Uncle Sam.
So if you’re a Treasury investor and feel on the spot, you don’t have to rush to decide what to do next.