Treasury Inflation-Protected Securities

• Both headline and core inflation numbers fell short of consensus estimates.
• Gasoline prices fell 0.5% in May, following a 5.7% increase in April. Gas prices could be a deflationary force in coming months.
• May’s mild inflation report leaves the door wide open for the Federal Reserve to begin cuts in short-term interest rates.

This report looks like good news for the stock and bond markets, because it reinforces the Federal Reserve’s likely plan to begin lowering short-term interest rates, possibly twice in 2019. The first cut could come next week, or possibly in July.

Read my full analysis on SeekingAlpha.com

• FRNs, 2-year Treasury investments, have been in the news recently because their yields topped all Treasury investments with terms up to 10 years.
• FRNs are attractive during a time of rising interest rates, especially for cash you know you will be holding for two years.
• But during a period of declining rates – which could be coming – shorter-term investments give you more flexibility, with just a small yield penalty.

On May 31, a typical FRN was yielding about 2.4% while the 10-year Treasury yield had dropped to 2.14%. That means FRNs currently have about a 25 basis-point advantage over a 10-year Treasury. That’s a pretty remarkable example of yield inversion, because the FRN’s base interest rate matches the current 13-week Treasury.

Read my full analysis on SeekingAlpha.com

• The 0.3% increase in the Consumer Price Index fell slightly below the consensus estimate, so no shock to the markets.
• Core inflation rose at an annual rate of 2.1%, showing that inflation exists outside of rising gasoline prices.
• Good news for holders of TIPS: June principal balances will rise by 0.53%, following increases of 0.56% in June and 0.43% in May.

The April inflation report again pointed to energy costs as the primary driver of U.S. inflation. The gasoline index rose 5.7% for the month, and is now up 3.1% over the last 12 months, reversing a long trend of declining prices.

Read my full analysis on SeekingAlpha.com

Also, I’ve updated my Tracking Inflation and I Bonds page with the new numbers.

And I updated the TIPS Vs. Nominals page with results for the 5-year TIPS that matured in April. That TIPS under-performed a nominal Treasury by 0.34% a year.

And here are the new June Inflation Indexes for all TIPS.