5-Year Notes, 5-Year TIPS, and Risky Assets

We've had two auctions this week.

On April 26, 2010 the 5-Year TIPS was auctioned. It received a 0.55% rate over inflation.

On April 28, 2010 the 5-Year Note was auctioned. It received a fixed 2.54% interest rate.

That would imply that investors expect 1.99% inflation per year over the next 5 years.

There's a bit more to the story though.

The 5-Year Note auction amounted to $42,000,023,300. Of that a mere $127,631,300 was bid noncompetitively. That's 0.3% of the total.

The 5-Year TIPS auction amounted to $11,000,030,700. Of that $342,625,700 was bid noncompetitively. That's 3.0% of the total.

I am a small investor and I bid noncompetitively. I participated in the 5-Year TIPS auction. I did not participate in the 5-Year Note auction. Apparently I was not alone.

I am clearly running with the "small investor" herd. If I am wrong to do so, then we should expect less than 1.99% inflation per year over the next 5 years. That's the only way that nervous small investors can do worse than brave institutional investors.

As a saver, I am fine with that. I have embraced safety. Even in TIPS, inflation never helps me. Small investors who have embraced risk elsewhere (for the third time in just one decade) might not be similarly pleased though.

FOMC statement

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

In my opinion, that paragraph is playing like a broken record and will continue to play like a broken record. The record will be especially broken if China's "treadmill to hell" fails.

China’s Stocks Fall to Six-Month Low on Slowing Economy Concern

China is “on a treadmill to hell” because it’s hooked on property development for driving growth, hedge fund manager James Chanos said in an interview this month. As much as 60 percent of the country’s gross domestic product relies on construction, Chanos said.