You might not have noticed, but yields on US Treasurys touched a six-month low on Monday, meaning their value has been heading in a surprising direction: Up. (Prices on bonds rise as yields fall.) This is a surprise because just about everyone was predicting a bond rout in 2014, similar to the one we saw beginning in mid-2013. But that hasn’t happened.
Reasons? The appeal of Treasurys rises when the world faces crisis (unrest in Urkaine), the economy is slumping (GDP dropped to 0.1% in the first quarter), and riskier assets are getting stomped (the stock market has stumbled in 2014 after big gains in 2013.) Here’s an interesting chart, comparing the TIP ETF, which holds a wide range of Treasury Inflation-Protected Securities, with the Dow Jones Industrial Average, through 2014:
For TIPS holders this is all nice news – the value of your holdings has increased – but TIPS buyers are again looking forlorn, holding cash on the sidelines and waiting to invest. Prices right now do not look attractive. Here’s a recap of where we stand:
- 5-year Treasury, On Jan. 2, it was yielding 1.72%, now it is yielding 1.68%, a drop of 4 basis points.
- 5-year TIPS. On Jan. 2, it was yielding 0.01% and now is yielding -0.24%, a drop of 25 basis points.
- 5-year inflation breakeven. On Jan. 2, it was 1.71% and now is 1.92%, a rise of 21 basis points. This means a 5-year TIPS has gotten more expensive versus a traditional Treasury.
- 10-year Treasury. On Jan. 2, it was yielding 3.00% and today is yielding 2.63%, a drop of 37 basis points.
- 10-year TIPS. On Jan. 2, it was yielding 0.74% and now is yielding 0.45%, a drop of 29 basis points.
- 10-year inflation breakeven. On Jan. 2 it was 2.26% and today is 2.18%, indicating that a 10-year TIPS has gotten less expensive versus a 10-year Treasury.
- 30-year Treasury. On Jan. 2 it was yielding 3.92% and today is yielding 3.41%, a drop of 51 basis points.
- 30-year TIPS. On Jan. 2, it was yielding 1.58% and today is yielding 1.11%, a drop of 47 basis points.
- 30-year inflation breakeven. On Jan. 2 it was 2.34% and today it is 2.30%, meaning a 30-year TIPS has gotten slightly less expensive versus a 30-year Treasury.
Conclusion. The TIPS market is not leading the Treasury charge in 2014. TIPS yields have declined less than those of traditional Treasurys, except for the 5-year maturity. This means that TIPS probably aren’t more risky than traditional Treasurys, which wasn’t the case in 2013.