- The after-inflation yield looks likely to come in around -0.20%.
- Buyers will pay a premium for the coupon rate of 0.125%, probably about $100.71 for $100 of value.
- The inflation breakeven rate remains low enough to make this TIPS attractive for big-money investors.
Negative yields plus the return of deflation make TIPS a dog (deja vue all over again). Of course, this is coming from a guy who passed on TIPS last year because the FED was going to be raising rates in 2016. Surely the yields would be better once that happened, right?
There’s 5 year CD’s available at 2.3%. That’s more attractive than a 5 year Treasury with a yield of 1.15% (by a factor of two). It’s on par with a 30 year Treasury that’s currently yielding 2.28%. This just shows how totally whacko the bond market is (thanks to the Europeans and Japanese).
Having lived thru the 70’s and 80’s, I really love the concept of inflation protection. However, it’s too expensive right now. Based upon the 0.84% annual inflation rate and that 2.30% CD, it comes to about 15 grand per million dollars per year.
Heck, you’re breaking even with inflation with a basic savings account (which might actually be the safe bet for now). Until the yields on TIPS get significantly better and the inflation picture turns consistently positive, I won’t be increasing my current level of 10% iBonds and TIPS any further.
my projection is for the fed to stay seriously behind the curve, and for CPI and rates to stay nominally low. if inflation is 4% and rates are 2% thats 100% return. i also believe feds will use inflation to project fiscal stimulus in the form of COLAs. the fed will overcount. rates rise faster than CPI and you hedge with FRN. Hussman has a scattergraph of rates and CPI, and surprise they don’t correlate very well below 5%, but 10% TIPS will not hedge 90% stocks.
I’d say there is a chance that inflation could increase more than interest rates, mainly because central banks across the world are pushing 5- to 10-year nominal yields below zero. If the Fed raises short-term rates, the dollar could gain strength and Treasury yields could fall even lower.
However, I don’t trade TIPS. My strategy is to buy and hold to maturity. In this case, it’s just a 4-year, 8-month investment. But I probably won’t be buying at Thursday’s auction.
you’re buying these expecting yields to fall further? i wouldn’t do it without hedging it with an FLN. I always assume rates will move higher with inflation, is there any chance that might not happen?