TIPS fared even worse than regular Treasurys in the bond market selloff this summer, and - down 8% YTD - are headed for their poorest performance since they were brought to market in 1997. The 10-year yield gap - the difference between 10-year yields on nominal and inflation-protected Treasurys, and a measure of inflation expectations - has shrunk to 2.14% from 2.5% at the start of the year.
TIPS owners for years have accepted negative real yields on the expectation the Fed's monetary ease would lead to higher inflation. With inflation still quiet and the Fed set to wind down its QE, where's a TIPS bull to turn to? 2014 may be even worse, says JPMorgan, which sees CPI no higher than 1.7%. Combined with what the team expects will be a 120 basis point rise in real yields, it translates into a 8.4% loss for TIPS.
Maybe bailing out TIPS next year would be a Yellen-led Fed indicating a greater tolerance for higher inflation and yet more delays in the taper.