The market for Treasury Inflation-Protected Securities rebounded nicely last week after several days of panic selling in the wake of Federal Reserve Chairman’s Ben Bernanke’s comments on ‘tapering’ of the Fed’s bond-buying stimulus program. The TIP ETF rose 2.8% on the week.
But the needle has definitely moved, with 10-year TIPS returning solidly to yields positive to inflation. As of Friday, the 10-year nominal Treasury had settled in at 2.52%, up 66 basis points this year. If it holds at that level for the near term, TIPS yields should be holding steady around Friday’s numbers:
- 5-year TIPS, with a yield of -0.35%, up 101 basis points this year.
- 10-year TIPS, with a yield of 0.53%, up 115 basis points this year.
- 30-year TIPS, with a yield of 1.31%, up 84 basis points this year.
The recent selloff in TIPS was much more frenzied than the overall Treasury market (115 versus 66 basis points) and that pushed the 10-year inflation breakeven point down sharply, settling in at 1.99% on Friday. I don’t think the breakeven rate is going much lower, so future rises in TIPS yields should follow nominal Treasurys more closely.
Here’s a chart showing the 10-year TIPS breakeven rate over the last 10 years. Although the rate can decline sharply at times of panic, it traditionally runs above 2.0%:
Michael Ashton, an inflation watcher who writes the E-piphany blog, makes the case that TIPS won’t continue under-performing Treasurys:
As the bond selloff extends, I don’t think TIPS will continue to underperform nominal bonds. I believe breakevens, already at low levels (the 10-year breakeven, at 1.97%, is lower than any actual 10-year inflation experience since 1958-1968), will be hard to push much lower, especially in a rising-yield environment.
TIPS may be a much-hated investment at the moment, but I suggest looking beyond that noise for opportunities to invest, in a laddered approach or dollar-cost averaging. TIPS are a lot more attractive in July 2013 than they were six months ago.