kdo

TIPS: Nominal Yield, Risky Real After-Tax Return

I don't agree at all with the premise that a real rate of return required by investors never changes. It's called fear.

What's So Puzzling About TIPS?

btw - rereading your article, I realize you put in the part about what TIPS are indexed by, so I am a little perplexed by your conclusion and misinterpreted it as thinking you're saying CPI is underreported and TIPS pricing is capturing that opinion (my bad). Much of the out performance I'd guess is because while the last 12mo inflation numbers are @ 1.9%, the last few years have not been and has included several nuggets over 4%, which I'm sure was over the long term prediction of inflation when the security was bought.

It seems that you're suggesting TIPS buyers have been rerating the bonds into seeing a larger inflation risk than nominal buyers. In that case, you'd see a large difference in the spreads being asked for, in the TIPS case, there would not be much yield being offered. While I don't have the data here in front of me, I've looked at it and I don't believe that's happened. I believe the out performance is just inflation which has already happened, not what is being predicted.

What's So Puzzling About TIPS?

TIPS are indexed to the CPI-U, so what difference does it make if the CPI numbers are wrong? Certainly won't help the TIPS.