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:
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.