“The Federal Reserve’s latest all-in, open-ended bond-purchase policy is shaking the nerves of investors thinking about the potential inflation effects of all that additional money in the financial system,” Deborah Levine writes for MarketWatch. “That’s boosted iShares Barclays TIPS Bond Fund (TIP) … Rising interest in the fund indicates more demand for protection from inflation.”
Some analysts watch the relative performance of TIP against iShares Barclays 7-10 Year Treasury Bond (NYSEArca: IEF) to gauge inflation expectations. The ETFs have similar durations, so when TIP is outperforming, it means inflation expectations are moving higher.
Michael Gayed in a MarketWatch commentary notes a “sharp spike is under way” in the ratio following the Fed’s QE3 announcement. A rising ratio “tends to coincide with a strong environment for risk assets,” he added.
The chart below shows the relative performance of TIP versus IEF.
Full disclosure: Tom Lydon’s clients own TIP.