Breakeven Bounce Reveals Risk for TIPS

Nov.19.10 | About: iShares TIPS (TIP)

The risk of TIPS is evident by the recent bounce in the breakeven rates. The breakeven for a Treasury is the difference between its yield and the yield of a TIPS security having similar maturity. The breakevens of 5-Yr and 10-Yr continued to widen yesterday, ending around 5 basis points wider. The 20-Yr breakevens ended about 3 bp wider.

This increase in breakevens seems to be driven by a big rebound in risky assets, viz. stocks, energy, commodities and gold. Below is a graph of the 5-Yr breakeven and its 50-day moving average. It clearly shows the 5-Yr breakeven bouncing off the 50-day.

(Click to enlarge)

According to a TIPS trader, dealers currently do not have many long positions in TIPS. This, combined with the risk rebounding suggests that the breakevens might trade well in the coming days.