I was on vacation and away from a computer (an iPad is NOT a computer) the last two weeks, and blog-writing was impossible. Enjoy the glories of Vancouver Island, B.C., or struggle with writing a blog on an iPad? Easy choice.
But it has been an amazing three- to-four weeks for TIPS, with yields rising sharply and the price of the TIP ETF falling sharply, all starting about two weeks before the May 23 reissue auction of a 10-year TIPS.
Recapping how the yields have risen:
|Date||10-year Treasury||10-year TIPS yield||Breakeven|
The 10-year TIPS yield rose a dramatic (!) 67 basis points in little over a month, while the rate on a nominal 10-year Treasury rose 51 basis points. That means TIPS got cheaper, pushing the 10-year breakeven inflation rate to a decent 2.14%. Remember it was running at 2.53% in January 2013, when TIPS were in much greater demand.
The rise in yields took a toll on the TIP ETF, which fell from $121.81 on May 1, all the way down to $115.44 on June 7. That’s a decline of 5.3% in 38 days — and demonstrates why I have not been a fan of owning TIP ETFs or mutual funds since July 2011. As these funds continued to hit all-time highs, risk was being built into the price.
And the decline may not be over: TIPS are the ugly stepchild of Treasurys right now, because they are being hit by the worst-case ‘perfect storm’: 1) higher interest rates, and 2) lower inflation. With inflation running just 1.1% over the last 12 months, TIPS have little appeal to the average investor, offering a low (or negative) base yield plus a paltry inflation adjustment.
This chart demonstrates what a rising breakeven rate looks like, at a time when Treasury yields are also rising. The TIP ETF has performed much more poorly than the IEI (intermediate-term Treasurys, a fund with a similar duration):
Should buyers avoid TIPS? No way. For the buy-and-hold investor of Treasury Inflation-Protected Securities, the trend means that TIPS are getting interesting again. The yield on a 10-year TIP has inched back into positive, and this month’s 30-year auction should generate a yield well above 1%. Not stellar, but at least interesting.
And inflation? The current very low rate can’t and won’t continue if the economy continues to improve and central banks across the world continue creating money. The inflation protection that TIPS offer continues to be valuable.
What about the ETF? My theory is that the 10-year Treasury could rise to about 2.75% by the end of the year, and if it does, that would set the 10-year TIPS yield at about 0.5%, about 47 basis points higher than it is today. If that happens, the TIP ETF would fall another 4%, or maybe to the $111 to $110 range. At that point, I might be a buyer.