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March 3, 2021
Forbes: A TIP To The Wise: Don’t Look At TIPS To Protect Against Inflation From Here
Alas, I believe the metric is no longer valid as an informational tool. This is because the Fed has bought more TIPS since the coronavirus crisis started last year than the total amount issued. Digest that for a moment: the Fed bought over $175 billion of TIPS from March 13, 2020 to the end of February, 2021, whereas only $150 billion or so of new TIPs were issued (Source: Bloomberg, Federal Reserve). In percentage terms, the holdings of the Fed have gone from less than 10% over the same period to over 20%. Of the over $1.5 Trillion dollars of outstanding TIPs, the Fed owns over $300 Billion. And yes, the Fed has also bought a very large amount of ordinary, nominal Treasuries.
The metric that seems to be no longer valid is using the difference in rates between nominal Treasuries and inflation-protected Treasuries to determine future inflation expectations.
In theory, by concentratong more on buying TIPS, the Fed is distorting the market's inflation information.
However, I feel like there's a piece of this puzzle that's possibly still missing. If the market itself was buying extra TIPS, it seems possible to ne that the Fed was simply following the market's lead. In that case, the Fed would be buying more in an attempt to not distort the market's inflation information.
In any event, it is certainly very interesting to me that the Fed's been buying more TIPS than have actually been issued lately.
Long-term readers of this blog know that TIPS are a favorite investment of mine, since I value capital preservation and sleep over the potential rewards of growth. I recently sold some TIPS to buy utility stocks. Should the real yield on the 30-year TIPS reach 1% again someday, I'd be very tempted to embrace TIPS fully again. Since I also believe that yields will continue to fall over the long-term, the temporary window of that opportunity happening may be closing. That's especially true if the Fed keeps buying like they have been.
In my very humble opinion, the most likely opportunity will be within a year. Nothing drives real yields higher like "economy overheating" in the headlines. And right now, momentum is driving yields higher. Where it stops nobody knows. It seems extremely unlikely to me that we'll be seeing overheating economy headlines several years from now though, even if we are still stuck in ZIRP. Or perhaps I should say, especially if we are still stuck in ZIRP.
Schedule for Week of December 22, 2024
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Happy Holidays and Merry Christmas!
The key economic report this week is November New Home Sales.
*----- Monday, December 23rd -----*
8:30 AM: *Chicago Fe...
4 hours ago
4 comments:
If I were managing Treasury, I would have spent last year issuing 30 or even 50 year bonds, since rates were low. I'd ask the Fed to buy up as much of the TIPS and Series EE as I possibly could, because effectively Fed holdings are money that Treasury owes to itself (the Fed rebates the interest profits to Treasury). I'd rather owe the high-rate stuff to myself than you.
Your window is probably later than you think. Have a look at foreign direct investment. $1.5 to 2 trillion per year since 2011. That's not really investment; that's capital flight - would you buy German bunds at -0.3% interest? Thought not. So until that investment flow reverses, rates aren't going to rise all that much. The market was already balking at 2% in late 2019. Now, when those foreign investors actually have to spend that money, then the investment is forced to unwind, and then the cost of capital will rise.
You’ve got tough competition at the Treasury.
Announcing the reduction of the annual limit on how much money we can put into savings bonds in the very first month of the Grest Recession was a genius move. It’s almost like somebody noticed that trouble was coming.
Illusion of Prosperity: Extremely Bad News for I-Bonds!
The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.
It wasn’t perfect timing though. At least one horse made it out of the barn before the door was shut. Not saying that I am a horse, but still 9 years left on I-Bonds purchased in 2000, 10 years left on I-Bonds purchased in 2001, ... [innocently whiinying]
As for the TIPS opportunity, you could be right. The 30-year is at 2.38%. There is upward momentum but it will fail at some point. The only question is when. I see 3.2% as a probable maximum, but that does not mean it actually gets there.
You might be lucky to see 3% on the 30-year. The administration has announced plans for a tax increase. If they stick to changing rates, deductions, and the like, they'll be able to pass it via reconciliation the same way that they did with the Covid-19 bill.
You may remember Maxed Out Mama saying last year that reindustrialization was going to be important to healing the economy in the long run. How much reindustrialization do you think we'll get if the corporate tax rate goes back to 28% while the price of gas and diesel rises towards $4 a gallon (we've already seen gas run up from $2.10 to $2.90 since November). That forecasts that the final leg of recovery will be slow, like the long crawl out of the Great Recession. That doesn't argue for high interest rates ... at least, not until capital flight starts unwinding.
Agreed. It gets worse.
1. I posted this chart elsewhere. The spread between the 5-year TIPS and the 30-year TIPS is wide now. I don’t see the 30-year TIPS making it to 1% if the 5-year TIPS refuses to budge.
2. The 5-year TIPS has actually been doing worse than not budging though. Here is its chart. Falling real yield.
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