Inflation Fears Subside

The Lehman US Treasury Inflation Protected Securities ETF (TIP) is having one of its worst days of the year today, down a little more than 1.5%.  As shown in the first chart below, the ETF has been in a downtrend since topping out in mid March.  In the bottom chart, we compare the TIP ETF with the CRB Commodity index.  The two are relatively correlated, since TIPS "protect" against inflation, while the CRB index measures commodity prices. 

Interestingly, the TIP ETF has led the CRB index in their most recent rallies and declines.  The TIP made a short-term bottom last June and rallied sharply through this March.  The CRB index didn't really begin its spike until last August, and it didn't top out until early July.  Both are currently declining, which means inflation concerns are subsiding.  Based on recent trading patterns in the two, it may be worthwhile to look for a bottom in TIP before looking for a rally in commodities.

click to enlarge

 

Comments

[whidbey:]

Yes tips will rally once the sell off in equities gets underway. Commodities don't rally until the oil play is run out in late fall, it appears. But in any case flight to quality comes first. Central bank of Australia lowered its rate 25bp, looks like the slow down will be fairly wide spread and general, so demand for petrol may lack for longer than a year if the slow down rolls around the world.

2008 Sep 02 02:06 PM