5 Year TIPS Yields: How Much Further Down Can You Go Than Zero?

Aug.13.10 | About: iShares TIPS (TIP)

If you still think the bond market is worried about inflation, think no more. The yield on 5-year Treasury Inflation Protected Securities is at or near bottom I think. After all, how much further down can you go than zero? The following chart shows the yield on 5-year TIPS (red line) and 10-year (blue line) going back to 2003.

Since the spike in 2008, when inflation fears soared, TIPS yields have been trending down. The 5-year just hit zero. That means investors are really, really not worried about inflation. They don’t even need a return on their capital, just a return of their capital. The 10-year TIPS are at 1%. Yikes.

Click to enlarge

Source: Crossing Wall Street / St. Louis Federal Reserve

To me, this is a deflation bet or, to put it in psychological terms, a depression bet. These folks are giving up and parking their money rather than putting it in bond funds or stock funds, or even money market funds. What do you think?

Update: Two of our astute readers pointed out that I was misinterpreting the reasons for zero yields on TIPS. As Ted pointed out in the comments, the real [pun intended] point here was this:

…The breakeven yield on 5yr TIPS is ~1.5%, on the 10yr TIPS it’s ~1.75%. People are willing to accept a 0% real yield in exchange for protection against inflation greater than 1.5% over the next 5 years.

I wonder if it is a two-part decision. First part is to invest in Treasury securities for ‘return of capital’ even though that means there is no after-inflation yield. The second part is to hedge against higher future inflation.

Frankly, it does not seem like a good bet to me when one can get decent yields on high quality intermediate government agency bonds and bond funds, but so be it. Anything else I’m missing here?