Sat 8 Mar 2008
Has anyone seen the TIP rates? TIPS are inflation protected Treasury bonds and arguably offer a view of the minimum amount of “risk-free” real?return people expect on their money. According to Accrued Interest, the 2-year TIP yield is now -0.72%. That’s negative zero point seven two percent. People are willing to give their money away for the next two years to avoid?risking more in risky assets. This fits in line with the poor rates Jason pointed out at his banks. Throw inflation into the picture and they lose money. It kind of reminds me of people being held up at gun point and sheepishly handing over their wallet to keep from getting shot. It’s criminal. But keep reading the article above for some interesting alternatives that take advantage of the situation we find ourselves in.
March 8th, 2008 at 6:07 pm
Non-inflation adjusted 2 year bonds are trading at 1.5% (see here).
The -0.72% TIP rate would translate into a 3.56% yield (if I understand how the rate is calculated; CPI was 4.28% for January…).
So even though they are accepting less than inflation, buyers would triple their return.
Very interesting…
March 10th, 2008 at 3:30 pm
Minyanville had a great summary:
“What does this mean? Does a negative yield mean a Treasury Inflation-Protected Securities holder has to pay to own the security? In a way, yes. It means if you buy TIPs here you are essentially paying the government to do so because the yield is less than the Treasury equivalent.
Now why would anyone do that? Because TIPs are designed to provide protection against inflation. Investors can still earn money from TIPS with sub-zero rates because the principal rises with the CPI. TIPs pay interest twice a year at a fixed rate and that rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.
When TIPS mature an investor is paid the adjusted principal or original principal, whichever is greater. What the current negative yield situation means is that investors believe headline inflation is going to remain elevated and are willing to give up the real yield for the inflation-adjusted return of principal.”