Last October, after a wonderful trip to Ireland and visits to Diageo’s Bushmills (whiskey, in northern Ireland) and Guiness (beer, in Ireland) facilities, I had a thought: “Better long-term investment: 30-year TIPS or … booze?”
What was interesting at the time was how similarly the stock prices of Diageo plc (ticker DEO) and the TIPS ETF (ticker TIP) had performed over the previous five years. Here was the 5-year chart as of Oct. 15,2012:
In the posting, I noted that both Treasurys and Diageo were fully priced after strong runs. I speculated that an investment in a 30-year TIPS would beat Diageo for safety, but Diageo’s dividend and earnings growth meant it it would probably outperform a 30-year TIPS, which at the time was yielding just 0.38% above inflation.
So what has happened in the year since I wrote this? Here you go:
Since Oct. 15, 2012:
- TIPS yields have risen dramatically, with the 30-year reissue scheduled for Oct. 24 likely to draw a yield of about 1.38% , a 100-basis point increase.
- The TIP ETF closed Thursday at $112.65, down 6.6% from the $120.61 close on Oct. 15, 2012. This negative number comes even after a recent run-up in TIPS prices.
- Diageo closed Thursday at $125.89, up 13.1% from the $111.30 close on Oct. 15, 2012. This positive number – nearly 20% better performance – comes despite a recent dip in Diageo’s stock price.
What does it mean? Nothing really. Stock prices and Treasurys have benefited from Federal Reserve stimulus. But if the bond-buying stimulus tapers away or ends, TIPS and Treasurys will see yields rise and prices fall.
Booze won’t be much affected. People will still drink.
Joe, thanks for the heads up on the new information on TreasuryDirect. I know little about the floating rate notes but I am very curious. The first auction is coming up in January. I believe they will have a 2-year term (versus 0.33% currently for a two year) but they will have a floating rate tied to the 3-month (currently 0.03%). So obviously these are going to seriously lag inflation.
Thanks for response, I will stick with ibonds and tips. Joe
I notice information on the Treasury Direct website information on a new floating rate product. I assume this is available for taxable products and not tips products. How will the floating rate product measure up to the tips products considering that interest rates should rise in high inflation environments? Thanks. Joe Keenan