A 10-year TIPS is yielding 0.34% (plus inflation) today on the secondary market, a drop of 27 basis points since the last auction Sept. 18, which resulted in a yield of 0.61%.
That’s a pretty big turnaround for TIPS. The chart below shows three months of price changes for the TIP ETF, which hold a broad range of maturities, versus the SPY ETF, which hold the S&P 500 stocks. The turnaround began on Sept. 18 – the very day of the 10-year TIPS reopening – when the yield reached its highest point in five months. That is also the day that the S&P 500 hit its three-month high.
So TIPS are benefiting from a flight to safety, but not as much as might be expected. The reason? The market is pricing in very low future inflation, and that is putting a cap on demand for TIPS.
At yesterday’s close, a traditional 10-year Treasury was yielding 2.35%, according the US Treasury daily estimate. A 10-year TIPS was yielding 0.39%, creating a 10-year inflation breakeven rate of 1.96%. So a 10-year TIPS will outperform a 10-year Treasury if inflation runs higher than 1.96% over the next 10 years. That is a low breakeven rate, and it indicates demand for TIPS hasn’t really increased much as the stock market has declined.
Here is a chart of 10-year breakeven rates since January 2012, and it demonstrates the very steep and very fast decline in inflation expectations:
My general feeling is that TIPS are attractive – at least versus traditional Treasurys – when the breakeven rate drops below 2%, as it has now. But yields have also dropped in recent weeks, making TIPS a little less attractive overall.