As stock markets wavered violently over the last week, the market for Treasury Inflation-Protected Securities has been remarkably sedate, and surprisingly, there is no apparent demand for TIPS as a ‘safe harbor.’
This chart shows the 5-day market results for TIPS, represented by the TIP ETF in blue, versus the overall stock market, represented by the SPY ETF in red:
This is surprising because TIPS for years have been the safe harbor investment of choice: 1) for safety, and 2) for inflation protection against possible monetary moves to stimulate the markets.
Remember the last correction? It had been more than four years since the stock market suffered a decline of more than 10%. In fact, the last stock market correction – which began in July 2011 – was the starting point for an explosion in the value of TIPS, pushing yields negative to inflation for years. I wrote about this in my April 25, 2103, article titled, ‘The TIPS earthquake: When did it happen, and why?’
That article included this chart, showing the huge move up for Treasurys and TIPS which began at the exact moment the stock market plummeted (oddly enough, in reaction to Standard & Poors downgrading US Treasurys):
You can see in that chart that TIPS greatly outperformed the overall bond market for the remainder of 2011 (represented by the AGG ETF in red). But this time – the 2015 correction – that isn’t happening. As the stock market plummeted this week, TIPS values actually declined. And this chart shows that TIPS aren’t out-performing the overall bond market:
A final thing to note: TIPS have also been lagging the overall Treasury market, meaning that inflation breakeven rates have been falling over the last week. That happens when TIPS yields rise more than Treasury yields. Here are the numbers:
|5-year TIPS||5-year Treasury||Breakeven|
|10-year TIPS||10-year Treasury||Breakeven|
|30-year TIPS||30-year Treasury||Breakeven|
Conclusion. What can we take from this? 1) That the market does not fear inflation and does not expect the Federal Reserve to rush in with economic stimulus, 2) That the market is viewing the current stock market volatility as a correction and not the beginning of a major bear market, and 3) that the market still believes higher interest rates are coming, if not in 2015, then early in 2016.
TIPS are not going to be the ‘safe harbor’ investment in 2015. If yields continue to climb, we could see buying opportunities.