The TIP ETF just fell below $110. Is that a buy signal?

I am not invested in TIPS mutual funds; my preferred strategy is to buy TIPS at auction and hold them to maturity. But I do follow the TIP ETF to check on the overall trend in TIPS, and I have said for a long time that TIPS values would be returning to a more ‘normal’ level when the TIP ETF dropped below $110.

That has happened a few times in the past five years, and it happened again this morning. Here is the five-year chart:

5-year TIP ETF

A lot has happened over those five years, as is reflected in the chart. In mid 2011, the Treasury began an aggressive bond-buying program, which lowered long-term yields and spurred fears of inflation. The value of Treasury Inflation-Protected Securities soared and real yields plummeted well below 0.0%. TIPS were in high demand.

Then, in June 2013, Fed Chairman Ben Bernanke announced a ‘tapering’ of the bond-buying, and inflation fears were doused. The Consumer Price Index began sliding down as oil prices began declining. TIPS were no longer in high demand. The TIP ETF lost about 8.5% of its value in 2013 – a shock for some investors who thought it was a bulletproof investment.

So where do we stand today? Of the 39 TIPS currently trading in the secondary market, only 3 still have yields negative to inflation. That is a far cry from April 12, 2013, when 35 of the 39 TIPS were trading with negative yields, all the way up to a TIP maturing in April 2032.

TIPS were a horrible investment in April 2013. They are a lot more attractive in November 2015, even after a year of zero inflation.

  • A 5-year TIPS – if auctioned today – would yield 0.42% above inflation, according the Treasury’s Real Yield Curve estimates.
  • A 10-year TIPS would yield 0.71%.
  • A 30-year TIPS would yield 1.27%.

And TIPS remain cheap when measured against traditional Treasurys. The 10-year inflation breakeven rate, shown in the chart below, is currently running about 1.57%. Investors are pricing in very low expected inflation. Generally when the breakeven rate falls below 2%, TIPS are a bargain. This is well below 2%.

I am not recommending dumping your money into TIPS mutual funds, but I think they are a much safer investment now than they were in 2013. And I think upcoming TIPS auctions will be worth watching.

The next one is Thursday, Nov. 19, the reopening of a 10-year TIPS, CUSIP 912828XL9. It will be going off at a big discount. More on that later.


About Tipswatch

Author of blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
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5 Responses to The TIP ETF just fell below $110. Is that a buy signal?

  1. Pingback: The TIP ETF just dipped below $110. Is that a buy signal? | Treasury Inflation-Protected Securities

  2. maynardGkeynes says:

    I haven’t read the book, but as far as TIPs bond funds, I’m surprised Larry says that, because he has said there’s nothing wrong with them on Bogleheads several times. He prefers holding TIPS directly, but he is not against TIPS funds, at least last I heard.

  3. Len says:

    Speaking of Larry Swedroe, everyone should read his bond book so they would stay away, far way, from bond funds which would include bond ETFs as well. For my money the only mutual fund I would touch is a stock index fund- from Vanguard

    • tipswatch says:

      I know that Larry doesn’t much like Vanguard’s Total Bond Fund, which I use as a core fund. I don’t see many alternatives as a very diversified, very low cost fund. Larry likes the intermediate Treasury funds, but man, those got extremely overvalued. Vanguard’s Total Bond might not overachieve, but that’s not my goal.

  4. maynardGkeynes says:

    I bought a few 29yr at 1,3% today. The best I ever did on a 30, back in 2005, was 1.79%, so the difference is acceptable to me, all things considered, and as Larry Swedroe has oft said, you can’t buy yesterday’s rates. But I didn’t want to overdo it, even at 1.3% But if he 30 ever goes to 1.5%, I’m all in with my “safe” money … fingers crossed.

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