I won’t say ‘yes,’ but TIPS in general look attractive for the first time in several years.
By David Enna, Tipswatch.com
For many years, I’ve been tracking the price of the iShares TIP ETF, which holds the full array of TIPS maturities. Over that time, I’ve noticed something odd: The ETF’s net asset value consistently bounces higher after dipping below $110.
I have no investments in TIP and my favored fund of this type is Schwab’s U.S. TIPS ETF, which has a lower expense ratio. But TIP is the biggest and most-watched fund investing in Treasury Inflation-Protected Securities, so I use it as a proxy for the market.
I’ve thrown this $110 theory out there many times in the past, including this article I wrote on November 6, 2015, with exactly the same headline. On that day, the TIP ETF closed at $109.87, very close to Friday’s close of $109.70. The ETF also broke through the $110 barrier on March 20, 2020, a day of chaos throughout the stock and bond markets.
Here is a chart tracking the net asset value of the TIP ETF going back to January 2011, the first year of aggressive Federal Reserve intervention in the Treasury market:
Does this look like a coincidence or some kind of true price resistance? My theory is that each of these dips reflects a rise in real yields to attractive levels, but in almost every case since 2011, the Federal Reserve eventually stepped in to lower Treasury yields, and in turn to increase the NAV value of the TIP ETF.
Back in November 2015, when I noted the $110 milestone, this was the state of the TIPS market:
- A 5-year TIPS had a real yield of 0.42%.
- A 10-year TIPS, 0.71%.
- A 30-year TIPS, 1.27%.
And this is the situation at today’s market close on (Sept. 16, 2022):
- A 5-year TIPS has a real yield of 1.13%
- A 10-year TIPS, 1.07%
- a 30-year TIPS, 1.25%.
When was the last time real yields were this high? Back on Nov. 27, 2018, when the 5-year real yield reached 1.16%; the 10-year, 1.15%; and the 30-year 1.34%. And … it just so happens that the TIP ETF closed at $108.48 on that day. One year later, the TIP ETF closed at $116.65. Two years later it was at $126.28.
What’s the point?
The bond market is a very scary thing in September 2022 and I’m not going to argue that anyone should be pouring money into TIPS mutual funds or ETFs. But I will argue that TIPS in general — along with these funds — are much more attractive today than they were six months ago, when the 10-year TIPS was yielding -1.04% and the TIP ETF was trading at $122.46.
I have been nibbling into TIPS since May with small purchases at auctions, reallocating money from SCHP to individual TIPS. I think it is time to start taking some bigger bites, starting with next week’s 10-year TIPS reopening auction. I’ll be posting a preview of that auction on Sunday.
Keep in mind that these are my investments and my opinions. I am a journalist, not a financial adviser.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.