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John Hussman, manager of the Hussman Fund, published a pessimistic essay this morning about the long-term impact of the de-coupling of the Chinese Yuan from the US dollar. He says:

It's not the 2.1% revaluation that creates significant risk for the U.S. economy, but China 's diversification to a basket of currencies, and also the inevitability of additional much more significant revaluations in the not-too-distant future.

Crawling pegs, historically, are very hard to sustain without periods of major turmoil. This is especially true today given the profound depth of the U.S. current account deficit. A shift away from a pure dollar standard for China 's peg necessarily reduces the need to accumulate U.S. dollar reserves...

In short, my impression is that there's a U.S. dollar crisis ahead...

Mr Hussman predicts that major dollar weakness will throw the US economy into recession due to its impact on domestic investment. (Domestic investment is currently funded by incoming capital flows.) That, in turn, will lead to a fall in real interest rates. As for nominal interest rates,

While my bias is to expect at least some inflationary pressure, it's not a strong bias, and I don't have much of a view about nominal  interest rates at all.

The bottom line: inflation-protected bonds will benefit from a fall in real interest rates (bond prices move inversely to interest rates), but non-inflation protected bonds could fall due to a rise in inflation and nominal interest rates.

Translation to ETFs: TIP is more attractive than TLT.

Hussman's full article is here.

Source: Hussman on TIPS and Treasuries (TIP, TLT)