- Tracking the differential in the yield of TIPS (Treasury Inflation-Protected Securities) and conventional Treasury notes renders an indicator known as the BEI - the breakeven inflation rate.
- The BEI gets its name because it represents a point of indifference - the level of inflation at which you’d receive approximately the same total return on your TIPS as you would on a conventional T-note if CPI inflation averages that rate over the next 10 years.
- Back in February, the 10-year BEI cratered at 1.18%. It's now retesting the 1.67% resistance area. If it break, and stays, above 1.70%, the next upside objective is the 1.90% level, SA author Brad Zigler says.
- If the pattern holds, investors could readjust their portfolio’s fixed income exposure and duration with the following ETF play: The 10-year BEI is proxied by the price ratio of the iShares TIPS Bond ETF (NYSEARCA:TIP) versus the iShares 7-10 Year Treasury Bond ETF (NYSEARCA:IEF).
- Zigler notes that the TIP/IEF ratio broke above its 100-week simple moving average ("SMA" - see chart here). "Without going into a bunch of technical interpretation, suffice it to say that this sets up TIPS as the better buy for income-focused investors - for the long term."