Plunging TIPS ETF Seen Bullish for Stocks, Bearish for Gold

June 10th at 11:25am by John Spence

The iShares TIPS Bond ETF (NYSEArca: TIP) is down 7% from its all-time high with rising Treasury yields and falling inflation combining to weigh on the $12 billion exchange traded fund. The sell-off in the inflation-indexed bond ETF could be a bullish signal for equities and a negative indicator for gold and other safe-haven assets, analysts say.

For the first time since 2009, U.S. bond yields are rising at the same time inflation is slowing, Bloomberg News reports. Meanwhile, the yield spread between TIPS and regular Treasury bonds reveals investors have cut their expectations for consumer price increases to the lowest level since July.

Rising Treasury yields and falling inflation expectations are poison for TIPS.

TIPS values are linked to changes in the Consumer Price Index but the bonds are also sensitive to interest rates like normal Treasuries. So TIPS can lose value when Treasury yields rise.

The CPI fell 0.4% in April from the previous month on lower gas prices. For the 12 months that ended in April, overall prices rose 1.1%, the smallest annual gain in two and a half years, according to the Associated Press.

Bloomberg reports that the last time yields rose while inflation slowed was four years ago, following President Barack Obama’s $787 billion stimulus plan. Also, the so-called breakeven rate between TIPS and Treasuries last week narrowed to the lowest since July.

The breakeven rate is determined by comparing the yields of regulator government bonds against inflation-protected securities of the same durations. If inflation averages more than the breakeven rate over a given time period, then investors would be better off owning TIPS than normal Treasury bonds.

On Monday, yields on 10-year TIPS turned positive for the first time since January 2012, reports Ben Eisen for MarketWatch.

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