Why Are 5-Year TIPS Trading At A Record Low Negative Yield?

Includes: GLD, TIP
by: Shaun Connell

Bloomberg news just reported:

The U.S. sold $16 billion in five- year Treasury Inflation Protected Securities at a record low negative yield as investors continue to pay a premium to hedge against the threat of rising consumer prices. The securities were auctioned at a so-called high yield of negative 1.08 percent, the fifth consecutive sale of the debt at a negative yield.

Meanwhile, gold has still been fairly boring, sticking around the $1,600 range without budging much. A friend of mine commented that anyone willing to buy into TIPS at an instant loss was crazy, and should just buy gold instead.

He's right over the long-term, but over the relatively short-term, I think there's something to be said for TIPS. The point of TIPS isn't to beat inflation but to keep up with it. Gold does that over time, but in the short run it's very volatile. It depends on what the investor is trying to do with the money.

This doesn't mean I'm necessarily defending TIPS -- I don't own any and don't plan on owning any at any foreseeable point. But the purpose is fairly different.

I love gold, but it's a long-term inflation and a doomsday hedge -- not a short-term inflation hedge. Inflation didn't disappear during the 90s, but gold prices lagged. There's a reason for that. Gold is based on supply and demand (like everything) and is volatile. Just look at any GLD chart of the last few years.

TIPS, on the other hand, aren't quite as volatile, though of course they have their fair share of ups and downs in the ETF market, as a look at the iShares Barclays TIPS Bond Fund (NYSEARCA:TIP) can show. TIPS have limited downside risk compared to gold, and are less likely to get annihilated if something goes 'wrong' with inflation predictions.

So yes, over time, gold keeps up with inflation for people looking to hedge. But in the short run, not quite so much, necessarily. And that can be a massive problem for some portfolios and investors who are looking to cut risk.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I own physical gold and will be likely adding to my position regularly for the foreseeable future.