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TIPS ETF with Negative Yield Sees Outflow


The iShares Barclays TIPS Bond Fund (TIP), which currently has a negative yield, saw nearly $500 million move out the door on Monday to lead all daily ETF outflows.

The Treasury Inflation Protected Securities fund logged net outflows of $471.4 million on Feb. 4, or about 2.1% of the ETF’s total assets, according to IndexUniverse data.

TIP has a negative 30-day SEC yield of -4.67%, according to manager BlackRock (BLK). The fund holds $22.1 billion in assets.

“How can this be? And why would investors accept a negative yield? The answer is that the yield on a TIPS bond is equal to the Treasury bond yield minus the rate of expected inflation,” writes Thomas Kenny at About.com Bonds. “As a result, when standard Treasury bonds are trading at yields that are below the expected inflation rate – as has been the case since late 2010 – TIPS yields will fall into negative territory.”

“Would you buy an investment that was guaranteed to lose money? That is the situation investors are embracing today in the market [for TIPS],” writes Brett Arends at WSJ.com.

“FRC, a Boston firm that tracks the mutual-fund industry, says U.S. investors own at least $145 billion worth of TIPS through funds that specialize in them. The amount of TIPS in circulation has risen 50% in five years to $850 billion, according to the U.S. Treasury,” Arends notes.

The government has been selling TIPS with negative yields for years now. Investors buying bonds with negative yields illustrates the premium investors are willing to pay for inflation protection. It also highlights how low Treasury yields are now. [Why TIPS ETFs Have Negative Yields]

TIPS bubble?

“To adjust for inflation, a TIPS’ principal goes up or down with the Consumer Price Index, which is an indicator of inflation,” Morningstar analyst Abby Woodham writes in a profile of the BlackRock ETF.

“When the CPI goes up, the TIPS’ principal is adjusted up accordingly. Even though the interest rate on the bond remains the same, the semiannual coupon is paid based on the adjusted principal,” she adds. “Through this process, a TIPS’ principal and interest payments are protected against inflation as measured by the CPI.”

ETFs that invest in TIPS have been falling with nominal Treasuries as bond yields rise. The pullback in TIPS is a reminder that these inflation-indexed bonds can also be hurt by higher interest rates. [TIPS ETFs Fall with Treasury Bonds]

Still, PIMCO Total Return ETF (BOND) manager Bill Gross on Twitter has been suggesting investors buy TIPS as central bank stimulus creates bubbles and distortions in all markets.

“Despite record-low real yields for [TIPS] that are causing apprehension and confusion among some investors, we remain as convinced as ever that TIPS still offer potential advantages over nominal Treasuries – especially in an environment where inflation will likely reach over 2% for the foreseeable future,” PIMCO said in an April 2012 commentary by Jeremie Banet and Mihir P. Worah.

“Investors have been buying TIPS in recent years for two reasons, say analysts,” Arends wrote in the WSJ.com story. “Some are looking for a better alternative for their short-term money than cash, which is earning almost 0%—and less than inflation. Others are looking for long-term protection against the risk of surging inflation.”

For TIPS ETF investors, the inflation “breakeven rate” is important to watch. It is determined by comparing the yields of regulator government bonds against inflation-protected securities of the same duration, usually 10 years. If inflation averages more than the breakeven rate over the next decade, then investors would be better off owning TIPS than normal Treasury bonds. [TIPS ETF Hits All-Time High]

Other TIPS ETFs include PIMCO 1-5 Year TIPS (STPZ), SPDR Barclays Capital TIPS (IPE) and Schwab U.S. TIPS (SCHP).

iShares Barclays TIPS Bond Fund


Full disclosure: Tom Lydon’s clients own TIP and BOND.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.