More ‘Operation Twist’? So far, no big deal for TIPS

The Federal Reserve announced June 20 that it will extend its program of selling short-term Treasuries and buying long-term Treasuries, effectively extending ‘Operation Twist’ beyond its scheduled expiration at the end of this month. From the McClatchy Newspapers report:

Because of the deteriorating conditions, the Fed said, benchmark interest rates are likely to remain near zero through at least late 2014. And a program set to expire this month, where the Fed swapped out $400 billion in short-term bonds for bonds of longer duration, will continue through the end of the year.

The Fed did not indicate the size of the swap for the rest of the year, but said it would trade out bonds with maturities of three years or less for those with maturities of six years to 30 years.

The expected result would be for Treasury values to strengthen, but the market for Treasury Inflation-Protected Securities, already at record-high prices (and low yields), has responded with a ‘ho-hum.’

Here’s a chart comparing prices over the last five days for TIP (the TIPS ETF) and TLT (the long-term Treasury ETF, shown in red in the chart):

So far, Operation Twist is doing little to support the very-lofty values for TIPS.

However, the Fed’s commitment to holding short-term interest rates very close to zero through 2014 will provide support for TIPS because yields on traditional Treasuries will remain very low. If break-even rates remain around 2.0%, TIPS will continue to provide negative yields to inflation for many more months.

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3 Responses to More ‘Operation Twist’? So far, no big deal for TIPS

  1. Joe says:

    If you look at the fidelity bond desk, there is a one year tips with a positive yield of .3. Is this from operation twist. If we get 2 percent inflation this could be a good short term investment.

    • tipswatch says:

      You are right, there is a 2013 Apr 15 TIPS that seemingly has a yield to maturity of 0.368%, as of today’s market close. This looks like an anomaly since a traditional 1-year Treasury is paying 0.21%. If this TIPS pays 0.368%, plus the rate of inflation, this TIPS is a winner even if there is zero inflation over the next year.

      The Boglehead forum has an interesting thread on this topic: http://www.bogleheads.org/forum/viewtopic.php?t=98382

      The feeling in that thread, by experts like Larry Swedroe, is that this TIPS is a BUY, with some cautions, mainly that deflation in the next year (like we had in May) could lower the principal value of your holding.

  2. joe says:

    I guess Deflation is the risk with the Apr 15 tip bond. I know you can’t get below par, but there is alreay inflation built into the bond, so with deflation in theory one could lose money nominally from my understanding of TIPS but not in real terms. Kind of confusing to explain to people.

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