Demand for inflation protection evident in the 5 yr TIPS auciton
By Peter Boockvar - October 26th, 2009, 1:13PM
The demand for inflation protection was evident in the Treasury 5 year TIPS auction as while the yield was about in line with expectations, the bid to cover of 3.10 is the highest since they were reintroduced in 2004 and is well above the average seen since ’04 of 2.12. The implied inflation rate in the 5 year TIPS today is rising a large 13 bps to 1.71%, the highest since June.
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October 26th, 2009 at 1:47 pm
So there is truly a belief that inflation is about to take off? I’d say, it’s about time that someone noticed what inflation in the “Real” economy means. None of this literary “inflation by definition” stuff. That maybe works during times when markets act as we were taught, but these aren’t those times….
October 26th, 2009 at 2:22 pm
It’s the tippy-top in TIPS, especially if we are at another “tipping point”.
October 26th, 2009 at 2:55 pm
I really don’t understand investing in TIPS. If inflation really does take off, there is no way the government is going to be honest about it. It is 100% in their best interest for them to report (with whatever “corrections” or “inflation calculation modification” is needed) low inflation. Additionally, if inflation takes off, TIPS play in the U.S. dollar world so any payoff from TIPS is just going to further fuel the inflation. Are we talking about protection from 3-5% real inflation in the future? If so, it seems there should be much better investments than that.
October 26th, 2009 at 4:13 pm
As Peter has explained here, if you actually buy and hold the TIPS themselves (not a fund) you are protected from deflation as well as a moderate amount of inflation. So it sort of protects you from extremes – for a defined period.