reluctantQuant

Cause for Concern: No Change from the Fed

Methinks the long-end has spoken. good day to study the curve. flat curve = complacency ... steep curve = fear.

the long end is trying to tell Ben something.

--rq

Gold Lease Rates Show LIBOR's a Lousy Interest Rate Indicator

So what rate would you use? Or is this more about throwing out the whole indicator - could see either approach...

Yes, one can invest at higher rates than LIBOR, but that's not why LIBOR was used for the indicator. LIBOR is the first step in the credit ladder of interest rates. Changing the credit component - well, that's not what the indicator is really about is it?

--rq

Why Investors Should Avoid TIP

Vindicator:
"SPDR DB International Government Inflation-Protected Bond ETF ... seeks results that correspond to ... DB Global Government ex-US Inflation Linked Bond Capped Index."

Holdings indications from
www.spdrs.com/product/...

You can download the holdings in a .csv file.
In no particular order, you've got some Euro, Brit, Brazil and Aussie, some Canada, Japan and Mexico IL bonds, among others. Each bond type is driven off a domestic CPI index, usually a sub-index off the headline CPI. For example, France uses the French CPI ex-tobacco (hilarious).

The "exact inflation measure" used is most easily looked up on a Bloomberg using the ISIN numbers (in the download file). Alternately, you can go to each countries' government treasury investor information webpages (hmm. enjoy).
--rq

On May 26 02:23 PM Vindicator wrote:

> Does anyone have a resource to identify the exact inflation measure
> used by the more significant holdings in WIP? Do any of them use
> US Govt CPI? Their own government's measure of inflation in their
> own single country? Some kind of govt or private measure of regional
> (Eurozone, for example) or global inflation?

Why Investors Should Avoid TIP

hmmm. lotsa stuff here... I'm in the "TIPs are good" camp, but I wouldn't say they're the perfect real asset, specially for that investor who can gain exposure to other real assets easily. But for the appropriate investor, especially the very long term retail investor, they are better than cash as a default asset. You can expect a REAL return on the order of 65 to 90 basis points. If you really do your homework, you might find that surprisingly good -- especially if retirement sufficiency with limited uncertainty is important to you.

With respect to this article, readers might note

1. Any grandma can buy TIPS directly, easily, from the U.S. Treasury, and NO grandma should be paying manager fees to BGI for something this simple. Any TIPS investor should be a very long term buy-and-holder, not a tactical investor who's doing a shorter term inflation dance. And in that scenario, even if it's only 20bps, ANY FEE IS A SIGNIFICANT DRAG ON *REAL YIELD*. If one wants TIPs, www.ustreasurydirect.gov will set you up cheaper than Schwabbie

2. Furthermore, these "real asset proxy" ETF's are not impressing the hell out of anyone with their tracking error. Yes, they can be very useful. Still, for fun, throw USO on a chart against WTI Crude and sing me the "it's a daily tracker" song again, please please. ETF's are generally great for tactical, but not for long term strategic - particularly when you CAN invest in the underlying cheaply and easily.

3. The big giggle idea above is that the government could ever be so well coordinated that they throttle the CPI data for the benefit of the U.S. Treasury's bond expense. Like "left hand number 1,765,234" knows what "right hand number 1,987,456" is doing. Mmm hmmm. With roughtly $5.8 Trillion par of UST's outstanding and like $480B of TIPs, what do ya get by nudging the par uplift a point or two on only 8% of the UST's outstanding par?

You equity guys are funny enough, but when you bring the conspiracy cats - then we really have a party going on,... tap that second keg, Jeeves!

--rq

Rising Long-Term Interest Rates Go Hand in Hand with the Expanding Economy

Hmmm... no examination of TIPs implied inflation breakevens? Not rocket science, albeit imperfect. Better if you use a pair of constant maturity indices. I'll use 7-year, since 7 is such a lucky number (especially in, say.. October 2007). Note to non-bond-geeks: If I have a seven year nominal treasury and a seven year inflation-protected treasury, the simple yield difference is a simple indicator of the inflation premium paid by the nominal bond above the inflation protected security. Note to true bond-geeks: yeah, there are devils in the details, so just take it with a basis-point of salt.

so here are the month end values for the last year...
06/30/2008 2.44
07/31/2008 2.16
08/29/2008 1.97
09/30/2008 1.23
10/31/2008 -0.61
11/28/2008 -1.43
12/31/2008 -0.09
01/30/2009 0.73
02/27/2009 1.00
03/31/2009 1.14
04/30/2009 1.29

Wadda we see? Well, yes, inflation expectations are indeed rising, but the first half of 2008 averaged about 2.25. And interestingly enough, it's never broken 2.90 on a weekly chart. Again, this is 7 year forward expectations. I'd say that BondLand is indeed out of "disinflation mode" - as we would expect. When this gets north of 2.50, then the inflation concern gets interesting. The bond market is a better forecaster than most, and it's not yet buying the hyperinflation trade. Supply and demand dislocations between FRB/UST action, Dealer balance sheet stress and unwinding the flight to quality trade are much larger factors in today's market posture. Those factors MUST be included in any short term rate move interpretations. This inflation indicator is based on very very large capital flows, folks. Something to watch. Not screaming yet. Stay tuned.


--rq