Treasury Inflation-Protected Securities

• A bear market for Treasury Inflation-Protected Securities? Not based on this auction, which generated strong demand.
• The coupon rate of 0.12% fell just below the coupon rate of 0.125%, meaning buyers had to pay a small premium for this TIPS.
• TIPS have been out-performing the overall bond and Treasury markets over the last week. Inflation protection is still ‘in’.

TIPS have been on the move this week, with yields falling and prices rising. It’s a bit of a shock for those predicting a collapse in the Treasury market. And today’s auction was probably a bit of a disappointment for investors expecting a slightly higher yield.

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• The Federal Reserve’s key short-term interest rate has increased 25 basis points.
• Shorter-term Treasury yields have increased as much as 87 basis points since May.
• But interest rates on bank CDs have barely budged. It’s time for savers to benefit from higher CD rates.

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• November prices were choppy, with costs of gasoline and shelter creating most of the increase.
• Non-seasonally adjusted inflation fell 0.16%, which will cause a drop in TIPS principal balances in January.
• With rising real yields, TIPS are looking to be a strong investment in 2017.

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

And here are the new January Inflation Indexes for TIPS.

• TIPS have held up relatively well because of a rise in the inflation-breakeven rate.
• We haven’t entered uncharted waters — today’s TIPS yields are in line with recent numbers.
• Bear market for TIPS? Not yet, and doesn’t seem likely.

I’m predicting that TIPS will be an attractive investment heading into 2017.

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