Speculation on another round of monetary stimulus from the Federal Reserve caused another record negative yield for U.S. 10-year inflation-indexed bonds, or TIPS.
“The market is projecting at some point in the near future that the Fed does act,” Justin Lederer, a strategist at Cantor Fitzgerald said. “I don’t think it happens in the next meeting, but the signs are pointing to further stimulus.”, reports Susanne Walker for Bloomberg BusinessWeek. [Inflation Protection:TIPS ETFs are New Safe Haven]
Recent manufacturing and unemployment claims reports have painted more of a dismal picture of the U.S. economy. Some analysts project that the U.S. economy may be in another recession. With TIPS, the bonds’ principal is linked to changes in the CPI (Consumer Price Index).
Bond analysts say that the threat of inflation has waned, but any further stimulus for the U.S. economy may create a swell in prices later. Inflation is a bondholders’ greatest nemesis because higher prices erode the value of the fixed stream of income they receive through the life of the security, reports Cynthia Lin for The WSJ. [Are Treasury Bond ETFs Bubblicious?]
Demand for TIPS has been strong even though the bonds have negative yields. At last week’s auction, buyers sought shelter from inflation buying the lowest yield ever on the 10-year TIPS, -0.637%.
TIPS-focused ETFs:
- iShares Barclays TIPS Bond Fund (NYSEArca: TIP)
- PIMCO 1-5 Year TIPS (NYSEArca: STPZ)
- SPDR Barclays Capital TIPS NYSEArca: IPE)
- Schwab U.S. TIPS (NYSEArca: SCHP)
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.