Why are TIPs having such a good run lately?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
MekongTrader
Posts: 357
Joined: Wed Jul 16, 2008 2:33 am
Location: On the banks of the Mekong

Why are TIPs having such a good run lately?

Post by MekongTrader » Thu Aug 11, 2011 1:45 am

TIPs are up 9% year to date. Can someone please explain to me why? Also dividends are much higher this year.

Is it because inflation is up?

30% of my fixed income is TIP (ishares).

Thanks
MT

User avatar
Noobvestor
Posts: 4668
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Re: Why are TIPs having such a good run lately?

Post by Noobvestor » Thu Aug 11, 2011 2:48 am

MekongTrader wrote:TIPs are up 9% year to date. Can someone please explain to me why? Also dividends are much higher this year.

Is it because inflation is up?

30% of my fixed income is TIP (ishares).

Thanks

MT
Safe bonds are up, thanks to stocks being down and people fleeing to safe asset classes.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

Valuethinker
Posts: 34890
Joined: Fri May 11, 2007 11:07 am

Re: Why are TIPs having such a good run lately?

Post by Valuethinker » Thu Aug 11, 2011 12:10 pm

MekongTrader wrote:TIPs are up 9% year to date. Can someone please explain to me why? Also dividends are much higher this year.

Is it because inflation is up?

30% of my fixed income is TIP (ishares).

Thanks
MT
1. safe asset. When the comparable nominal bond goes up it normally drags the TIPS up with it (2008 was a liquidity/ fear of deflation issue).

2. nominal yields are so low there is no inflation protection built into nominal yields. If the US does manage to restart inflation, nominal bonds will get hit. So TIPS really are the safest things there are out there.

mmmodem
Posts: 1242
Joined: Thu May 20, 2010 1:22 pm

Post by mmmodem » Thu Aug 11, 2011 12:20 pm

It doesn't make sense to me. The US credit rating gets downgraded. Doesn't that make TIPS more risky? And yet people flood to it the day after?

Call_Me_Op
Posts: 6819
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Why are TIPs having such a good run lately?

Post by Call_Me_Op » Thu Aug 11, 2011 12:37 pm

MekongTrader wrote:TIPs are up 9% year to date. Can someone please explain to me why?

Thanks
MT
Yes, it's called "flight to quality." Same thing that's propelling all US Treasuries.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Post by richard » Thu Aug 11, 2011 12:44 pm

mmmodem wrote:It doesn't make sense to me. The US credit rating gets downgraded. Doesn't that make TIPS more risky? And yet people flood to it the day after?
The rating downgrade was a non-event (except to headline writers). All the information was previously known and S&P has little if any credibility (CDO ratings, etc.). Market prices do a much better job of predicting issues with sovereign debt than rating agencies.

People are flooding to it because it's a safe asset and due to fears of very slow global growth, or worse.

mt
Posts: 150
Joined: Sun Dec 26, 2010 11:25 am

Post by mt » Thu Aug 11, 2011 1:02 pm

TIPS funds may be doing well, but if you want to buy TIPS at auction and hold until maturity you would not be saying they are "having a good run".

Sidney
Posts: 6678
Joined: Thu Mar 08, 2007 6:06 pm

Post by Sidney » Thu Aug 11, 2011 1:08 pm

they seem to do poorly on odd number days.
I always wanted to be a procrastinator.

User avatar
#Cruncher
Posts: 2548
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Why are TIPs having such a good run lately?

Post by #Cruncher » Thu Aug 11, 2011 1:52 pm

MekongTrader wrote:TIPs are up 9% year to date. Can someone please explain to me why? Also dividends are much higher this year. Is it because inflation is up?
About 3.3% points of the YTD return is due to inflation adjustment (*). TIPS funds and ETFs are required to pay these out as dividends along with the interest payments they collect.

(*) See REF CPI FOR 2011 and REF CPI FOR 2010. The CPI value has increased 3.3% from 218.7 on Jan 1 2011 to 225.9 on Aug 11 2011. For all of 2010 it increased only 1.2%.

User avatar
Mel Lindauer
Moderator
Posts: 28284
Joined: Mon Feb 19, 2007 8:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Post by Mel Lindauer » Thu Aug 11, 2011 4:34 pm

TIPS are taking a shellacking today (8-11-11).

http://www.bloomberg.com/markets/rates- ... -bonds/us/
Best Regards - Mel | | Semper Fi

natureexplorer
Posts: 4191
Joined: Thu Sep 03, 2009 10:52 am
Location: Houston

Post by natureexplorer » Thu Aug 11, 2011 4:36 pm

They can print treasury debt away, but not TIPS debt.

richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Post by richard » Thu Aug 11, 2011 4:57 pm

Mel Lindauer wrote:TIPS are taking a shellacking today (8-11-11).

http://www.bloomberg.com/markets/rates- ... -bonds/us/
Who would have ever thought we'd see rates on the 10 year TIPS soar to 0.02%?

User avatar
Mel Lindauer
Moderator
Posts: 28284
Joined: Mon Feb 19, 2007 8:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Post by Mel Lindauer » Thu Aug 11, 2011 6:42 pm

richard wrote:
Mel Lindauer wrote:TIPS are taking a shellacking today (8-11-11).

http://www.bloomberg.com/markets/rates- ... -bonds/us/
Who would have ever thought we'd see rates on the 10 year TIPS soar to 0.02%?
At least it's positive! :D

Yesterday all of the TIPS except the 30-year were providing negative real returns in the buying frenzy, and the 30-year real yield was only 0.81%-0.83%.

And yesterday, the 30-year was up over 6 and today it's down over 7. What a swing in just 24 hours.
Best Regards - Mel | | Semper Fi

User avatar
dave.d
Posts: 935
Joined: Mon Mar 19, 2007 10:30 pm
Location: Richmond, VA

Post by dave.d » Thu Aug 11, 2011 9:31 pm

TIPS have done so well, I sold the last of my remaining holdings in separate funds (e.g. VIPSX) at Wednesday's close as the real yield on the 10-year went below zero. I still have some held as collateral in the PIMCO commodity fund PCRIX.

I'm implicitly doubting that investors will accept zero real return in these things for very long. If I'm wrong, I'm not likely to miss much.

DISCLAIMER: I only posted this after today's 2% decline in TIPS made me feel brilliant. I probably would have suffered in silence if today had brought a 2% rise!
Value-based allocation: recently 23% stocks @PE10=27 and real bond yields approx. zero

DickBenson
Posts: 809
Joined: Sun Apr 08, 2007 7:27 pm

Post by DickBenson » Fri Aug 12, 2011 2:44 am

dave.d wrote:DISCLAIMER: I only posted this after today's 2% decline in TIPS made me feel brilliant. I probably would have suffered in silence if today had brought a 2% rise!
I also had a opportunity to feel brilliant on Tuesday, but I sold half of my TIPS ladder about an hour before the Fed made their announcement and TIPS prices took off.

However, my story (and I'm sticking to it) is that I really wasn't trying to time the market, but had decided that it was time to rebalance into cash.... and spend it. :)

Actually, I was overweight in fixed income (even have a large pile of I bonds for unexpected inflation), and although I have no need to take more equity risk, I am able and now willing to do so.... a little bit. The fact that some of the TIPS were in taxable accounts, and their eventual decline from their present values upon maturity were also significant factors in the decision.

Dick

User avatar
MekongTrader
Posts: 357
Joined: Wed Jul 16, 2008 2:33 am
Location: On the banks of the Mekong

Post by MekongTrader » Fri Aug 12, 2011 3:43 am

Thank you all.
MT

richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Post by richard » Fri Aug 12, 2011 5:20 am

Mel Lindauer wrote:
richard wrote:Who would have ever thought we'd see rates on the 10 year TIPS soar to 0.02%?
At least it's positive! :D

Yesterday all of the TIPS except the 30-year were providing negative real returns in the buying frenzy, and the 30-year real yield was only 0.81%-0.83%.

And yesterday, the 30-year was up over 6 and today it's down over 7. What a swing in just 24 hours.
This shows the virtues of not paying attention. If you pay attention, you see massive swings of 6 or 7. If you don't you see a small move of 1 for the entire period.

The real yield on the 10 year is negative again as of the moment.

StephenT
Posts: 49
Joined: Sat Feb 02, 2008 3:23 pm

Re: Why are TIPs having such a good run lately?

Post by StephenT » Fri Aug 12, 2011 9:27 am

#Cruncher wrote:
MekongTrader wrote:TIPs are up 9% year to date. Can someone please explain to me why? Also dividends are much higher this year. Is it because inflation is up?
About 3.3% points of the YTD return is due to inflation adjustment (*). TIPS funds and ETFs are required to pay these out as dividends along with the interest payments they collect.

(*) See REF CPI FOR 2011 and REF CPI FOR 2010. The CPI value has increased 3.3% from 218.7 on Jan 1 2011 to 225.9 on Aug 11 2011. For all of 2010 it increased only 1.2%.
Roughly speaking, does this mean if real rates rise as much as they fell, the comparable 8 month future return will be -5.7% (9%-3.3%)?

If this logic is right, for those holding individual bonds to maturity, the TIPS are insurance and fluctuations do not matter. If one tries to evaluate prospective returns over shorter periods, say a year, it might be worth selling in anticipation of real rates rising.

User avatar
#Cruncher
Posts: 2548
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Why are TIPs having such a good run lately?

Post by #Cruncher » Fri Aug 12, 2011 3:09 pm

StephenT wrote:
#Cruncher wrote:
MekongTrader wrote:TIPs are up 9% year to date. Can someone please explain to me why?...
About 3.3% points of the YTD return is due to inflation adjustment.
Roughly speaking, does this mean if real yields rise as much as they fell, the comparable 8 month future return will be -5.7% (9%-3.3%)?
Close, but you should also consider the real yield (past and future) and the future inflation adjustment. The total nominal return of an individual TIPS or a TIPS fund over a period like 8 months is approximately:
Tot Nom Ret = Real Yield + Inf Adj + Cap Gain --- where Cap Gain is due to the rise or fall of real yields.
Say that at the beginning of the year the real yield was 0.6% then we can back into the capital gain amount:
9.0 = 0.6 + 3.3 + 5.1 --- where 9.0% is from the OP who implies it's for the iShares TIP ETF

Say the real yield is now zero; then for the next 8 months assuming, as you do, that real yields rise back to what they were:
Tot Nom Ret = 0.0 + Inf Adj - 5.1 --- i.e., -5.1% plus whatever the CPI change turns out to be
StephenT wrote:If this logic is right, ... If one tries to evaluate prospective returns over shorter periods, say a year, it might be worth selling in anticipation of real rates rising.
The "logic" or the arithmetic may be right. But it doesn't tell you the future direction of interest rates. :)

hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Post by hsv_climber » Fri Aug 12, 2011 3:12 pm

Sidney wrote:they seem to do poorly on odd number days.
Can we build a market timing strategy to profit from that?

hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Post by hsv_climber » Fri Aug 12, 2011 3:15 pm

It is interesting to note that the difference between 10 year TIPS & nominals is only 2.29%. It seems like Mr. Market predicts a very low inflation over the next 10 years.

User avatar
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Post by LH » Fri Aug 12, 2011 4:44 pm

natureexplorer wrote:They can print treasury debt away, but not TIPS debt.
They can manipulate the cpi-u, or change it, to the chained cpi, or whatever.

User avatar
Noobvestor
Posts: 4668
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Post by Noobvestor » Fri Aug 12, 2011 4:48 pm

hsv_climber wrote:
Sidney wrote:they seem to do poorly on odd number days.
Can we build a market timing strategy to profit from that?
I believe you just did 8-)
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Post by hsv_climber » Sat Aug 13, 2011 1:50 pm

LH wrote:
natureexplorer wrote:They can print treasury debt away, but not TIPS debt.
They can manipulate the cpi-u, or change it, to the chained cpi, or whatever.

I don't think they can change it to the chained CPI. Not for the TIPS that were already sold. If TIPS were sold and TIPS buyers were told that it would've been linked to CPI-U then there is no way to change that without a big lawsuit.
Treasury can do it only for the new issues.

Valuethinker
Posts: 34890
Joined: Fri May 11, 2007 11:07 am

Post by Valuethinker » Sun Aug 14, 2011 6:07 am

hsv_climber wrote:It is interesting to note that the difference between 10 year TIPS & nominals is only 2.29%. It seems like Mr. Market predicts a very low inflation over the next 10 years.
I caution you about using the market to forecast these things.

The studies I know of in interest rates showed that the interest rate future was a worse forecast of future interest rates than simply assuming that today's interest rate would continue. The organization that did that study then abandoned trying to forecast interest rates.

A famous story about weather forecasting in WWII. The meteorologist was asked for a 6 week weather forecast, and said that was impossible. He was ordered to make one anyway, with the explanation 'even if the forecast is meaningless, the general needs a forecast in making his plans'.

I also believe that is true of commodity futures and commodity prices.

The reason being that these prices are set by current market conditions and interest rates.

Expectations are notoriously difficult things to extract out of market data.

What we can say is:

- the market does not have a great record of forecasting future inflation, but it appears to be pricing in lower inflation in the future than it was a few weeks or months ago.

That would imply there is a non zero chance of deflation or near deflation out there, which the market is now pricing in.

I would note that:

- the best solution, as Ken Rogoff has pointed out just recently, to the current market problem would be to run 5-6% inflation for a few years. That would neatly solve the problem of private sector debt deleveraging and bring the US and other economies back on track

- although that might be a good solution, there are strong institutional biases amongst Central Banks against adopting it (down, in the case of the ECB and the Bank of England, but not the Fed, to actual laws requiring them to target 0-2% inflation and 1-3% inflation, respectively)

- just because a government wants inflation does not mean it can achieve it: the Bank of Japan in particular has struggled with that one for decades. 3-4% inflation would be great for Japan at this point, but Japan teeters on the point of raw deflation.

Governments and Central Banks are perhaps surprisingly powerless against greater economic events.

User avatar
bobcat2
Posts: 5177
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Post by bobcat2 » Sun Aug 14, 2011 7:20 am

TIPs are up 9% year to date. Can someone please explain to me why?
Mainly because real interest rates have dropped substantially. The price of TIPS is more sensitive to real interest rate changes than the price of nominal bonds because nominal interest rates consist of both the real rate and the inflation rate, while TIPS prices are only sensitive to the real interest rate.

Why has the real interest rate dropped a lot this year?

No one can say for sure but probably mainly because the bond market anticipated moderate economic growth in the US economy at the beginning of the year, and instead economic growth in the first half of the year was very sluggish and is now expected to remain slow at best through at least the rest of this year. The price of TIPS has been rising all year, including even when the stock market was doing well through the first half of the year. So it definitely isn't just a flight to quality that accounts for the price rise in TIPS.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

dickenjb
Posts: 2941
Joined: Tue Jan 05, 2010 1:11 pm
Location: Philadelphia PA

Post by dickenjb » Sun Aug 14, 2011 7:36 am

Valuethinker wrote: I caution you about using the market to forecast these things.

The studies I know of in interest rates showed that the interest rate future was a worse forecast of future interest rates than simply assuming that today's interest rate would continue. The organization that did that study then abandoned trying to forecast interest rates.

A famous story about weather forecasting in WWII. The meteorologist was asked for a 6 week weather forecast, and said that was impossible. He was ordered to make one anyway, with the explanation 'even if the forecast is meaningless, the general needs a forecast in making his plans'.
Reminds me of a good joke. Albert Einstein dies and goes to heaven. St Peter warns him that they are very crowded and he must live with 3 roommates. The first roommate has an IQ of 160. "That's wonderful", Einstein exclaimed. "We can discuss my special theory of relativity".

"Your second roommate has an IQ of 130", St Peter continues. "Fabulous! We can discuss theater and philosophy", says Einstein.

"And your third roommate has an IQ of 80". "No problem", says Einstein. "We can discuss the direction of interest rates".

frederickj
Posts: 82
Joined: Fri Feb 29, 2008 9:53 am

The Rising Tips

Post by frederickj » Sun Aug 14, 2011 8:11 am

once again thanks to this site and all the contributors
woke up w the thought that I might do a slight re-balancing of my Tips Fund w my Total Bond Index fund
simply shift 10 of the Tips to the Total Bond Index
and met this discussion on arising

a lot of the discussion was beyond me, except that my proposed re-balancing made as much sense as any

thanks to all the contributors

frederickj

User avatar
#Cruncher
Posts: 2548
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Post by #Cruncher » Sun Aug 14, 2011 10:10 pm

bobcat2 wrote:The price of TIPS is more sensitive to real interest rate changes than the price of nominal bonds because nominal interest rates consist of both the real rate and the inflation rate, while TIPS prices are only sensitive to the real interest rate.
For bonds of the same duration, this isn't true. The change in price depends on the % point change, not the proportional change. So if a TIPS yield to maturity (YTM) goes from 1% to 2% and there has been no change in inflation expectations, the YTM for a nominal of the same maturity should also go up 1% point, say from 3% to 4% (*). Since both have changed 1% point, the price will change the same in proportion to their duration.

However TIPS bonds of the same maturity will usually have a slightly greater duration than nominals because they usually have a smaller coupon. For example the 0.625% TIPS of July 2021 has a modified duration of 9.6 compared to 9.0 for the 2.125% nominal Treasury of August 2021. In that sense, the statement is true: TIPS prices are (slightly) more sensitive to changes in real interest rates.

(*) Actually it should go up slightly more: 1.02 X (1.03 / 1.01) - 1 = 4.02%

biasion
Posts: 1417
Joined: Mon Aug 13, 2007 8:23 pm

Post by biasion » Sun Aug 14, 2011 10:14 pm

Valuethinker wrote: - the best solution, as Ken Rogoff has pointed out just recently, to the current market problem would be to run 5-6% inflation for a few years. That would neatly solve the problem of private sector debt deleveraging and bring the US and other economies back on track

- although that might be a good solution, there are strong institutional biases amongst Central Banks against adopting it (down, in the case of the ECB and the Bank of England, but not the Fed, to actual laws requiring them to target 0-2% inflation and 1-3% inflation, respectively)

- just because a government wants inflation does not mean it can achieve it: the Bank of Japan in particular has struggled with that one for decades. 3-4% inflation would be great for Japan at this point, but Japan teeters on the point of raw deflation.

Governments and Central Banks are perhaps surprisingly powerless against greater economic events.
I know that I have disagreed with a lot of forum posters on inflation, but I think these inflationary numbers are quite tame for what happened the last 10 years and what is going on now.

I think the US and Euro CPI's only work if: you don't travel, you don't drive (much), you don't own or buy real estate, you don't own a business, you don't need healthcare, you don't need higher education, you don't eat and you don't need heat or A/C in the house. To a retiree that goes nowhere, sits at home, pays little for healthcare (or is on medicare/medicaid which basically means you pay next to nothing), gets public housing, heating assistance and gets their food taken care of by food stamps, which is about 80% of them, CPI is very indicative of the situation because all the things that rise they don't pay for anyway. To the rest of us... well... Have you been to the supermarket lately?

From an economic point of view, late 2008 and early 2009 were a breath of fresh air with the possible hope of a tiny little bit of deflation, or at least some disinflation, but it was too good to last. I'd be overjoyed with 4-5% inflation numbers if only it was truly that low!!!!
1. Do not confuse strategy with outcome | 2. Those who fail to plan plan to fail | 3. Do not assume the unlikely is impossible, and | 4. Be ready to deal with the consequences if you do.

Valuethinker
Posts: 34890
Joined: Fri May 11, 2007 11:07 am

Post by Valuethinker » Mon Aug 15, 2011 4:21 am

biasion wrote:
Valuethinker wrote: - the best solution, as Ken Rogoff has pointed out just recently, to the current market problem would be to run 5-6% inflation for a few years. That would neatly solve the problem of private sector debt deleveraging and bring the US and other economies back on track

- although that might be a good solution, there are strong institutional biases amongst Central Banks against adopting it (down, in the case of the ECB and the Bank of England, but not the Fed, to actual laws requiring them to target 0-2% inflation and 1-3% inflation, respectively)

- just because a government wants inflation does not mean it can achieve it: the Bank of Japan in particular has struggled with that one for decades. 3-4% inflation would be great for Japan at this point, but Japan teeters on the point of raw deflation.

Governments and Central Banks are perhaps surprisingly powerless against greater economic events.
I know that I have disagreed with a lot of forum posters on inflation, but I think these inflationary numbers are quite tame for what happened the last 10 years and what is going on now.

I think the US and Euro CPI's only work if: you don't travel, you don't drive (much), you don't own or buy real estate, you don't own a business, you don't need healthcare, you don't need higher education, you don't eat and you don't need heat or A/C in the house. To a retiree that goes nowhere, sits at home, pays little for healthcare (or is on medicare/medicaid which basically means you pay next to nothing), gets public housing, heating assistance and gets their food taken care of by food stamps, which is about 80% of them, CPI is very indicative of the situation because all the things that rise they don't pay for anyway. To the rest of us... well... Have you been to the supermarket lately?

From an economic point of view, late 2008 and early 2009 were a breath of fresh air with the possible hope of a tiny little bit of deflation, or at least some disinflation, but it was too good to last. I'd be overjoyed with 4-5% inflation numbers if only it was truly that low!!!!
The CPI debate here is old and hoary, so you'll excuse me if I do not engage in it, except to note:

- I'm with Yale Endowment, in that they use a long run inflation rate of CPI+1%-- I'm quite prepared to believe that is realistic for an upper middle income consumer

- the Billion Price Project appears to show that quoted prices on the internet are tracking CPI pretty well, which is interesting because BPI does not track prices of services, which CPI does

- I think CPI underemphasises the change in the quality of things: especially healthcare but also computer technology, spread of air conditioning etc. A car now is just such a radically different beast than a 1967 Dodge Dart or a 1978 Pontiac Lemans or even a 1990 Chrysler Le Baron-- 3 very middle class cars of the times

The long run improvement in standard of living is underestimated: conversely the dispersion of income has grown very dramatically-- the middle middle really is treading water (and there has been a rise in personal economic uncertainty re jobs, healthcare, career etc.).

Yes Argentina rigs its inflation calculation. I don't see any evidence the US does.

Valuethinker
Posts: 34890
Joined: Fri May 11, 2007 11:07 am

Post by Valuethinker » Mon Aug 15, 2011 4:22 am

biasion wrote: you don't own or buy real estate,!
Quite. The average US citizen, on that basis, has seen something like a fall in cost of living of 40% (rise in real income on housing portion of consumption) by 40% in the last 3 years.

Valuethinker
Posts: 34890
Joined: Fri May 11, 2007 11:07 am

Post by Valuethinker » Mon Aug 15, 2011 4:26 am

bobcat2 wrote:
TIPs are up 9% year to date. Can someone please explain to me why?
Mainly because real interest rates have dropped substantially. The price of TIPS is more sensitive to real interest rate changes than the price of nominal bonds because nominal interest rates consist of both the real rate and the inflation rate, while TIPS prices are only sensitive to the real interest rate.
Probably the other way. ie TIPS prices have soared, nominal yields have fallen, so real yields have fallen.




Why has the real interest rate dropped a lot this year?

No one can say for sure but probably mainly because the bond market anticipated moderate economic growth in the US economy at the beginning of the year, and instead economic growth in the first half of the year was very sluggish and is now expected to remain slow at best through at least the rest of this year. The price of TIPS has been rising all year, including even when the stock market was doing well through the first half of the year. So it definitely isn't just a flight to quality that accounts for the price rise in TIPS.

BobK
1. flight to quality in that TIPS is a US Treasury Security, and the market is worrying about credit risk (from private sector in a renewed recession). US Treasury securities are 40% of the world supply of Aaa rated securities (i have switched to the Moody's to make the point).

Look if you are a big portfolio your options are limited: US Treasuries, Euro bonds (ike!), Sterling, Swiss Francs-- limited space to invest really big money.

2. yes there are other factors. In particular the outlook for nominal interest rates is now very low for an extended period. That makes TIPS more attractive.

hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Post by hsv_climber » Mon Aug 15, 2011 8:10 am

Valuethinker wrote: - I'm with Yale Endowment, in that they use a long run inflation rate of CPI+1%-- I'm quite prepared to believe that is realistic for an upper middle income consumer
In Richistan ( http://www.amazon.com/Richistan-Journey ... 0307339262 ), R. Frank claims that upper class has an annual inflation of 12+%. And the higher the class, the higher the inflation, since they are all competing for the limited amount of resources.
Just look at the lengths of their yachts. :wink:

But I think the lower you go down the chain, the less inflation rate really is. Because people are forced to make tough choices, so they do make them, i.e. eating apples when they are cheap and eating XYZ when XYZ is cheap, but apples are expensive (i.e. that what chained CPI is all about).

richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Post by richard » Mon Aug 15, 2011 9:03 am

Valuethinker wrote:The studies I know of in interest rates showed that the interest rate future was a worse forecast of future interest rates than simply assuming that today's interest rate would continue. The organization that did that study then abandoned trying to forecast interest rates.
Do you have a link or other identifying information?
Valuethinker wrote:the best solution, as Ken Rogoff has pointed out just recently, to the current market problem would be to run 5-6% inflation for a few years. That would neatly solve the problem of private sector debt deleveraging and bring the US and other economies back on track
Nominal GDP targeting seems a better solution than inflation targeting.
Valuethinker wrote:just because a government wants inflation does not mean it can achieve it: the Bank of Japan in particular has struggled with that one for decades. 3-4% inflation would be great for Japan at this point, but Japan teeters on the point of raw deflation.
The BOJ has not really tried to raise inflation. Here's a 1999 paper by Bernanke laying out the case for more aggressive monetary policy
http://citeseerx.ist.psu.edu/viewdoc/do ... 1&type=pdf

Valuethinker
Posts: 34890
Joined: Fri May 11, 2007 11:07 am

Post by Valuethinker » Mon Aug 15, 2011 9:15 am

richard wrote:
Valuethinker wrote:The studies I know of in interest rates showed that the interest rate future was a worse forecast of future interest rates than simply assuming that today's interest rate would continue. The organization that did that study then abandoned trying to forecast interest rates.
Do you have a link or other identifying information?
PM
Valuethinker wrote:the best solution, as Ken Rogoff has pointed out just recently, to the current market problem would be to run 5-6% inflation for a few years. That would neatly solve the problem of private sector debt deleveraging and bring the US and other economies back on track
Nominal GDP targeting seems a better solution than inflation targeting.
I had not thought of it-- not up on the conversation. It's an intriguing one (I mean that in the American sense ie 'worth investigating' rather than the Britoid 'that's very interesting' which means it has just been dropped like a dead duck)..
Valuethinker wrote:just because a government wants inflation does not mean it can achieve it: the Bank of Japan in particular has struggled with that one for decades. 3-4% inflation would be great for Japan at this point, but Japan teeters on the point of raw deflation.
The BOJ has not really tried to raise inflation. Here's a 1999 paper by Bernanke laying out the case for more aggressive monetary policy
http://citeseerx.ist.psu.edu/viewdoc/do ... 1&type=pdf
[/quote]

It's a fair point. The BofJ to be fair could not see the future. The ECB can, and yet it does not change.

You know what I fear as much as I know it. A commitment to monetary orthodoxy in interwar Europe led to 1). crippling the French war industry in the lead up to ww2 thus contributing to the disaster of 1940 2). political polarization of same 3). rise to power of one Adolf Schickelgruber, and the most terrible war in human history (OK 30 Years War, various Roman depredations, Genghis Khan, China's wars-- but the scale of WW2 was just unmatched, and the particular rigour with which the Holocaust was implemented).

We don't have to go that far to find Europe enmired in racial hatred, fear of immigrants, and a retreat to the darkest part of the Europe psyche-- that xenophobic id that lies beneath the civilized exterior.

My own fair land is given to many of the same tendencies. Already the government has ruled out the notion that its economic policies have *any* responsibility for recent events. (no one would argue all)

Lordy we need your man in the wheelchair. The radical policy innovationist of 1930s politics was also one of history's most calculatedly evil men. We had a reactionary Imperialist and political opportunist possessed of grandiose notions about Lord Marlborough and the military history of the British people, you had a playboy with polio and a nack for playing people off against each other. That the future of western civilization could have hung by the thin threads of those 2 men and their relationship, and the odd fixation of the third with inhabiting the lands of Eastern Europe with Germans, and so necesssitating a war to the death with the one nation that would shed blood as heedlessly. Or as Uncle Joe put it 'it takes a brave man to be a coward in this Army'.

Post Reply