Folks,
Yield Curve Signals Growth Ahead
http://finance.yahoo.com/banking-budgeting/articl…
It says inflation is expected to rise.
However the prices of TIPS (ticker - TIP, STPZ, LTPZ, IPE, TIPZ) have generally not risen. They are actually falling since Oct/Nov.
Does anyone know a way to reconcile this ?
(One way could be that the inflation expectations are already factored into the prices in Aug/Sept. And Oct/Nov rise in TIPS prices was due to speculation or excessive fears. And December prices indicate correction.)
-V
Keep in mind bonds have sold off rather significantly in the past months. Look at the spread between TIPS and nominal govies, ie the breakeven.
TIPS etfs are a rather poor proxy for the actual thing.
TIPS themselves are offering a negative yield currently, and based on demand, it shows institutional investors are quite ready to get a negative yield in return for this 'safety' Also, as TIPS track the government-stated CPI, they can basically say there is no inflation for the coming x years and TIPS will also give you a neg or 0 return.
So, in general, id stay away from such a manipulated security and, depending on your investment thesis, put the funds in some s/t corp bonds or the money market.
Yea, OP is confusing how to derive inflation expectations from TIPS. The yield on tips is the expected "real yield", which should correlate with the expected growth rate of the economy, minus inflation. To come up with a figure for expected inflation you can take nominal treasuries, which price as a real growth rate plus inflation, minus the TIPS yield. Of course this ignores a few risk premium factors such as the TIPS removing inflation risk which, considering current conditions, seems like one of the bigger risks.
Thank you all of you.
Revsly, My interpretation of your response is - bonds have sold off in recent months means the supply was too high and hence the bond prices went down and hence the yield curve looks steep (for the mid to long term). And hence the fact that yield curve looks steep indicates (MORE OF) the recent over-selling of bonds and not (SO MUCH) expected growth rate of the economy.
(Is this what you are saying ?)
Also how do I check the real TIPS prices ? I usually go to finance.google.com (A really basic question.)
-V
Did an analysis of TIPS and the TIPS spread once at work. The key is that the TIPS spread (Tips yield - nominal yield) i.e. a proxy for future inflation expectations isn't such a great proxy, because lots of factors go into pricing TIPS, which can change the price. Things like an insurance premium since they protect people from inflation risk, a liquidity discount since they are less actively traded come to mind.
Using TIPS in a play on this isn't the best idea since there is a weak correlation between the nominal TIPS yield and inflation, in part due to these other factors
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