U.S. Inflation Fell 0.8% In April, Largest Drop Since 2008

Summary

  • Gasoline prices fell a remarkable 20.6% in April, setting off a deflationary surge across the economy.
  • Core inflation fell to 1.4% year over year, breaking a 27-month streak of rates at or above 2.0%.
  • Inflation-protected investments, especially TIPS, will suffer in this deflationary period.

In a stunning reflection of the current U.S. economy, the Bureau of Labor Statistics reported today that U.S. inflation fell 0.8% in April, the largest drop since December 2008, at the opening of the Great Recession. Year-over-year U.S. inflation has now plummeted to just 0.3%, down from 2.5% at the beginning of the year.

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12 month inflation trend

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Treasury Cuts I Bond Fixed Rate To 0.0%; Holds Steady On EE Terms

Summary

  • U.S. Series I Savings Bonds purchased from May to October will pay a composite rate of 1.06%, annualized, for six months.
  • EE Bonds will continue to double in value if held for 20 years, creating a tax-deferred, compounded rate of return of 3.5%.
  • Both of these savings bond investments remain superior to better known alternatives offered by the U.S. Treasury.

The U.S. Treasury just announced it is cutting the fixed rate of U.S. Series I Savings Bonds to 0.0% as of May 1, a move that was widely expected and won’t dampen the appeal of these inflation-protected savings bonds.

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I Bond Fixed Rates

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Real Yield On New 5-Year TIPS Dips Deeply Negative, At -0.32%

Summary

  • The new Treasury reality is negative real returns and stunningly low inflation expectations.
  • The auction result of a real yield to maturity of -0.320% matched the Treasury’s overnight estimate.
  • The inflation breakeven rate of 0.69% makes this TIPS – even with a negative real yield – much more desirable than a five-year nominal Treasury. But there are better alternatives.

Today’s Treasury auction of $17 billion in a new five-year Treasury Inflation-Protected Security – CUSIP 912828ZJ2 – reflected a new reality of ultra-low yields and grim inflation expectations.

Investors got a real yield to maturity of -0.320%, the lowest for any TIPS auction of this term in five years.

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5-year TIPS history

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As 5-Year TIPS Auction Approaches, Real Yields Are On The Move

Summary

  • A new 5-year Treasury Inflation-Protected Security — CUSIP 912828ZJ2 — will be created at auction Thursday.
  • This TIPS looks likely to get a real yield to maturity in the range of -0.20% to -0.30%, but a firm prediction is impossible.
  • Reaction? It’s not an ugly investment idea, but I Bonds are clearly the better investment for your first $10,000.

This new 5-year TIPS should attract some investor interest, despite deflationary fears in the short term. A massive explosion of Federal Reserve stimulus and U.S. government deficit spending is being used to stabilize the financial system, and at least so far, it is working. The S&P 500 index is up about 22% since hitting a low of about 2,235 on March 23.

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5-year auction history

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Here’s Why The I Bond’s Fixed Rate Will Fall To 0.0% On May 1

Summary

  • Real yields for TIPS are now negative across the entire maturity spectrum: 5-year, 10-year and 30-year.
  • The Treasury has no reason to keep the I Bond’s fixed rate above 0.0% when the 10-year TIPS is yielding -0.50%.
  • Act before May 1 to lock in the current fixed rate of 0.2%. Surprises can happen, but that rate will almost certainly fall to 0.0%.

Nothing in this world is certain, but it looks highly probable that the U.S. Treasury will lower the fixed rate on U.S. Series I Savings Bonds from 0.2% to 0.0% on May 1, the next reset date. How probable? I’d say 95%.

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Inflation Report Sets I Bond’s New Variable Rate At 1.06%

Summary

  • U.S. Series I Savings Bonds purchased before May 1 will pay a composite interest rate of 2.22% for six months, and then 1.26% for six months.
  • I Bonds remain the world’s best inflation-protected investment, especially if you purchase them before May 1.
  • Gasoline prices sent the U.S. economy into deflation in March. Deflation looks like a trend that will continue for many months.

The March inflation report, just released by the U.S. Bureau of Labor Statistics, locks in the I Bond’s new inflation-adjusted variable rate at 1.06%, down from the current 2.02%.

The new inflation-adjusted rate will go into effect May 1, when the U.S. Treasury will also reset the I Bond’s fixed rate, which is currently 0.2%. That fixed rate is highly likely to drop to 0.0% on May 1.

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I Bonds Offer Opportunity As A Short-Term Investment

Summary

  • A unique feature of I Bonds is that yields are set for six-month periods and won’t change. Investors can now lock in the current yield of 2.22% for six months.
  • Deflation is coming, but shouldn’t be reflected harshly in the I Bond’s next variable rate, to be reset on May 1 based on inflation from October 2019 to March 2020.
  • Ideally, I Bonds are a long-term investment, part of a strategy of building inflation-protected cash. But a short-term option now opens up.

With the Federal Reserve slashing its key short-term interest rate to nearly zero on March 15, investors are going to see their return on safe short-term investments fall to zero in coming months.

Say goodbye to Treasury Money Market Funds paying interest of 1.5% or higher. We may not see those rates again for many months, possibly years.

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I Bond yield estimates

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10-Year TIPS Reopening Gets A Gorgeous Result

Summary

  • This was an investor-friendly auction: The real yield of 0.68% was much higher than looked likely a week ago.
  • The inflation breakeven rate of 0.43% is “out-of-normal” low and seems to be pricing in a dire economic future.
  • Treasury markets are in flux, with asset pricing and yields difficult to predict.

One of the strangest weeks in the history of Treasury Inflation-Protected Securities ended Thursday with a beautiful result for investors: The Treasury’s reopening auction of a 10-year TIPS got a real yield to maturity of 0.680%, much higher than looked likely just days ago.

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This Week’s 10-Year TIPS Reopening Looks … Who Knows?

Summary

  • Market turmoil has created incredible volatility, even for mundane investments like U.S. Treasurys.
  • Friday’s real yield of 0.04% would have been “attractive,” but it isn’t likely to hold in light of the Federal Reserve’s rate-cutting action Sunday.
  • The current 10-year inflation breakeven rate of 0.90% makes this TIPS a much more attractive investment versus a 10-year nominal Treasury. But that could also swing wildly.

In the midst of all this volatility, the Treasury on Thursday will offer $12 billion in a reopening auction of CUSIP 912828Z37, creating a 9-year, 10-month TIPS.

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10-year real yield

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Amid Bond Rally, The TIP ETF Got Crushed. Why?

Summary

  • The TIP ETF has lost more than 6% of its value in a few days, and is falling sharply again this morning.
  • A key reason is that inflation expectations are plummeting, causing the TIP ETF price to fall versus the overall bond market.
  • The market is pricing in a severe recession. But individual TIPS are a much better investment than nominal Treasurys. And TIP funds and ETFs¬† are looking more attractive.

Investors in the TIP ETF – an index fund that holds the full range of Treasury Inflation-Protected Securities – got a big surprise this week: a stunning 6.2% drop in value amid a what appeared major “safe haven” Treasury rally.

Why did that happen?

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TIP versus Treasury Market

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