I have pretty much lost my appetite for Thursday’s auction of a new issue 10-year Treasury Inflation-Protected Security. Why? It’s hard to swallow a jawbone.
The jawboning has been coming from Federal Reserve Chairman Ben Bernanke, who last Wednesday afternoon tried to scale back fears of future Fed ‘tapering’ of its aggressive bond buying. Again today, speaking to Congress, Bernanke went dovish on quantitative easing. From the Wall Street Journal report:
Federal Reserve Chairman Ben Bernanke amplified his efforts to calm markets about the end of the Fed’s easy-money policies, pointing to a variety of economic risks that could persuade the central bank to keep its large bond-buying program going in the months ahead. …
“Because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” he said. … In fact, if necessary, the Fed “would be prepared to employ all of its tools, including an increase [in] the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.”
The result. Last Wednesday, by Treasury estimates, a 10-year TIPS was drawing a yield to maturity of 0.64%. Today, according to Bloomberg’s real-time estimates, that yield has fallen to 0.30%. That’s a fall of 34 basis points in 5 market days. Here is how jawboning looks in a 5-day chart for the TIP ETF (its price rises when its yield falls):
I am not a fan of buying something while the price is soaring. I haven’t ruled out participating in this 10-year TIPS auction, but my enthusiasm definitely has waned. I think I will wait until Thursday morning to decide.
I am convinced that higher interest rates (and TIPS yields) are ahead. That means the best strategy is being patient for buying opportunities.
Treasury Inflation-Protected Securities 
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David,
In addition to the uncertainties you wrote, there is the chance that the following cons will cease. I suppose that thinking in the light could “Make a difference”. (buzzzzzz)
The big picture remains “The Public Be Suckered”
http://patrick.net/forum/?p=1223928
What I have seen is a sharp spike in yields when the market panicked over the Fed’s comments. Yields are now reverting to a lower equilibrium after the spike. We may see low yields, both real and nominal, for a decade. This auction may be as good as it gets for some time.
This is a chilling prospect, as it seems to assume a Japan-style “lost generation.” I take it tipswatch disagrees, and it does seem unlikely Bernanke and his successor will stand for that. What’s more, we’re ultimately going to have to inflate our way out of our deficit hole, aren’t we?
Tom, you said: “What I have seen is a sharp spike in yields when the market panicked over the Fed’s comments.” Yes, exactly. I think the bond market was going through a healthy readjustment to reality, in a world when the Fed is not manipulating the market. That will have to happen sometime in the future. Having a 10-year TIPS rate rise to 0.65% or a nominal 10-year Treasury rise to 2.75%, was hardly radical or even scary. But the Fed blinked. It couldn’t do it. Unless the Fed someday soon gets the resolve, the result is going to be inflation, ratcheting well above the ‘danger level’ of 2.5%. (Or as you suggest, the economy continues to be awful for the rest of our lifetimes.) The middle ground would have been to let the markets adjust, let rates rise to still very low levels, but the Fed couldn’t do it. Not yet.
Thanks for your superb efforts on this site. They are really appreciated out here.
JJ, I also have a TIPS roll-over this month. Once I calm down, tomorrow morning, I will probably put half of it into Thursday’s auction and half into September’s reissue. If the economy worsens, which doesn’t seem likely but could happen, TIPS yields will return to below zero. My guess is that Thursday’s auction will yield 0.40%, but that is a wild guess.
Do these recent developments also throw cold water on the upcoming Sept. offering? I had a $38k TIP mature this month (a small percentage of my portfolio) and had been planning to roll it over into a 10 year TIP Thursday, provided the YTM stayed positive. If that figure drops to .20 or below this afternoon, would there be a premium-to-park risk when tomorrow’s auction plays out? Would you pull the trigger now on this purchase, or wait a couple of months?
Thank you
The big picture remains “The Public Be Suckered”
http://patrick.net/forum/?p=1223928
Asset prices have been, UNSPOKENLY, the coming and going of irrationality.
Except: since March 2009 (stocks’ sharp minimum), Fed markets-manipulation by QEs is dominant.
“The Public Be Suckered” is NOT NOT NOT Red, White & Blue.