When the FED announced the policy of buying securities, TIP went up 5 or 6 dollars in 2 days. I would expect another rally in TIP, driving down the yields, if they announce they will implement the policy w/re to Treasuries.
Accourding to posts in the thread "Treasury tampering with TIPS calculations" fed already sees imbalances in treasury prices due to the filght to safety (i.e. not enough treasury bonds available).
It wouldn't make much sense to aggravate those imbalances by the fed itself.
Given governments foreseeable financing needs (budget deficit and stimulus package around 1 billion each) this probably will change in the foreseeable future, but that will probably take several months to a few quarters to materialize.
If the Fed announces they will begin purchasing treasuries, however, they will have steady prices and TIPS will appreciate markedly. Wed. will be important as we will get further clarification from the Fed on their asset purchase plans. This thing could rally this week. We'll see.
For example, if the market decides inflation will average 1% and the 10 year note stays at 2.5% then the 10 year TIPS yield will have to drop from 2% to 1.5%, and in the process, the price will appreciate considerably.
So the price difference between T-Bonds and TIPS will increase if inflation is higher than 0.5%. The difference can rise by either TIPS getting pricier or T-Bonds getting cheaper (or a combination of both).
Rising inflation means rising rates, rather sooner than later, putting pressure on standard bond prices. TIPS are protected from the effect of higher inflation as their principal value gets increased accordingly, making for (more or less) steady prices. T-Bonds prices of course will fall due to higher yields, providing for the bulk of the increased price difference.
I agree with your arguments, but i think your conclusion is wrong because you're assuming more or less steady T-Bond prices.
Buy TIPS for protection from higher inflation, buy TIPS and short T-Bonds to profit from it.
you make the mistake of using common sense. if common sense were used no one would buy 30 year treasuries at 2.9....are you kidding me. what you are missing is that the bond market is being artificially pushed lower by the flight to safety and the gov't itself trying to push borrowing costs down. the fed now owns the toxic mortgages, what do you think would happen if they let treasuries rise? they have to keep rates low at least short term. if you are buying for the long term hold part of your portfolio i think tips are a great buy now. short term who knows.
You might be right. We'll see. I agree the stock market is going to move w/in a range for a while probably. I don't believe this will go down to 95, but you might be right. Who knows. It will be interesting to see what happens with this, though.
I am completely puzzled by the prospect of TIP. All I know is it is a safe investment, and it will go up and down along the way. Great play when you have a big chunk of money to invest.