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I’ve written in the past about the misinterpretation of yield numbers on TIPS (Treasury Inflation Protected Securities). While the yield numbers (and price when expressed as percentage of par unadjusted for the inflation index ratio) have given false readings, the dollar value of a basket of TIPS does offer insight. Consider the chart below:

TIPS i-share vs 10-year Treasury Futures (June 09 contract)

TIPS iShare vs 10-year Treasury Futures (June 09 contract)

The chart illustrates the relative price performance of the Barclay’s iShare TIPS fund (NYSE Arca: TIP) and the 10-year T-note futures (June 09 contract) over the last 4 months. As can be seen from the chart, the basket of TIPS in the iShare has appreciated by about 8% while the treasury contract has been roughly flat. The best explanation for this relative outperformance is rising inflationary expectations.

Last fall, when TIPS falsely appeared to be signaling deflation, those who championed massive government spending cited TIPS performance as supportive evidence. Now that TIPS are clearly starting to warn of rising inflation, those same voices are noticeably silent on this fact.

Disclosure: Neither the author nor his clients have direct ownership in the TIPS iShare or T-note futures.

Source: Rising Inflation Expectations