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iShares TIPS Bond Message Board

  • elvispoc3 elvispoc3 Jun 24, 2011 3:53 PM Flag

    If we're entering a deflationary period...

    shouldn't TIP (and TIPs) be selling off here? At least a little?

    Instead, they are outperforming TLT, which seems counterintuitive to me.

    I own TIP's (not the ETF...actual TIP's bonds) through a mutual fund offered through my 401(k) plan and have been adding steadily since about February of this year.

    Anytime, things don't act the way they're supposed to, I get a little nervous.

    Any thoughts appreciated. I just want to be sure I understand the correlation (or maybe lack thereof) as between the TIPs and the 10 year bond. 10 year bond is signalling deflation (rates dropping precipitously), but the TIP continues to outperform when they're supposed to hedge against inflation (and, conversely, drop in value in the fact of deflation).

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    • Deflationary environment only means more QE from Federal Reserve Chairman. Ben intends to use monetary policy to create monetary, and thereby price, inflation through currency debasement. He's a rigid ideologue.

    • There are two forces at play right now due to slowing real growth.

      1. Low real growth tends to lead to low real yields. TIPS prices go up as real yields fall. TIPS are therefore performing well.

      2. Low real growth tends to lead to lower inflation. TIPS prices go down as inflation goes down. TIPS should therefore be performing poorly.

      Right now #1 is winning. The most important reason I own long-term TIPS is because I fear low long-term real growth. Inflation/deflation is just a side show to me by comparison.

      Investors were rewarded owning TIPS as the dotcom bubble popped in 2000. Rates were much higher before the pop than they are now. Locking them in was a good thing.

      Investors were rewarded owning TIPS as the housing bubble popped (assuming they did not sell during the initial deflationary panic). Rates were much higher before the pop than they are now. Locking them in was a good thing.

      If you can tell me that things are about to pop yet again then I wouldn't want to sell my long-term TIPS. While there might be some short-term deflationary pain again, I think it would eventually be offset by even lower long-term real growth expectations.

      Another explanation for what we are seeing might be that the market doesn't expect the same level of deflation we saw when oil crashed from the extreme of $145 to the extreme of $30. The average of $145 and $30 is $88. That's pretty much the price of oil right now. Maybe $88 is a relatively fair price, all things considered. Who knows?

      Just opinions of course.

      • 1 Reply to markm0722
      • Great stuff as always, Mark. Thank you kindly.

        Everything is counterintuitive these days it seems...the basic reason for the TIP's products existence is as an inflation hedge beyond what normal bonds offer. Yet, you make a compelling case that they are better barometer (and protection against) a low growth environment.

        Everyone agrees that interest rates will eventually rise precipitously and that current rates are the product of largely unnatural interventionist policies.

        I want to accumulate a position in the TIP's mutual fund I hold in my 401(k) as a rainy day hedge against the inevitable, coming high interest rate environment that is sure to eventually come...so I really appreciate your answer which illustrates the value of TIP's in the exact opposite scenario.

        GL and thanks again.

 
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