closedendtrader

Where's the 'Protection' in TIPS? Better to Go with Silver and Gold

I'm not a fan of TIPs at current yields, but you're drawing the wrong conclusion above:

"The standard five-year Treasury Note now yields 2.45%. Meanwhile, today's 5-year TIPS yield is only a slightly positive .07%, implying that investors' anticipated rate of inflation over the next five years is just 2.38%. That means investors expect a dramatic decline in inflation rates from the current "official" rate 4.1%-- which itself is likely understated. Such expectations are untenable given the actions taken by the government and Fed over the past 7 months."

The reason that investors are willing to buy TIPs with an implied inflation rate of only 2.38% is that if inflation stays at the current 4.1%, they'd earn a 4.17% return, far better than the 2.45% return on the regular Treasury. TIPs are overvalued because regular Treasuries are even more overvalued, a function of the credit crunch fears.