Treasury Inflation-Protected Securities

• The break-even rate details investors’ inflation expectations. It is not a predictor of future inflation.
• The trend since 1997 seems to indicate that investors underestimate future inflation. But TIPS have underperformed recently.
• Rising real yields and still-low inflation break-evens mean that TIPS are getting more attractive as an investment in 2017.

In the 11 years of TIPS auctions with completed 10-year maturities, inflation was underestimated in seven of those years, and overestimated in four of those years.

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• The real yield looks likely to come in right around 0.95%, close to the originating auction result.
• The inflation breakeven rate is trending at 1.83%, pretty desirable.
• One warning: Do not buy this TIPS in a taxable account. It may be cash-flow negative.

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• 12-month inflation has dipped to 1.9%, down from 2.7% in February.
• Core inflation is up 1.7% over the last year, also in a downward trend.
• Will the Federal Reserve back off on interest rate increases? Not likely today, but possible in the future if this trend continues.

Holders of Treasury Inflation-Protected Securities and I Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust the principal balances on TIPS and set future interest rates for I Bonds. May’s inflation index was set at 244.733, up 0.09% from April.

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Also, I have updated my Tracking Inflation and I Bonds page with these new numbers.

And here are the new July inflation indexes for TIPS.

• Real yields fell sharply this week in reaction to White House turmoil.
• The 10-year inflation breakeven rate came in at an attractive 1.79%, making this TIPS attractive versus a nominal Treasury.
• Market reaction looks positive, with TIPS yields falling after the auction close.

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