Treasury Inflation-Protected Securities (TIPS) were first issued by the United States Government in January 1997. This week’s chart looks back at the nearly 25-year history of a fixed income asset class that differs from nominal Treasury bonds through its ability to help combat inflation risks. Principal repayment at maturity for TIPS adjusts upward or downward by the level of inflation as measured by the monthly Consumer Price Index (CPI).
Yields on TIPS peaked above 4% in late 1999 but have moved steadily lower alongside falling yields on cash and money market alternatives. Zero short-term interest rates are becoming the new normal for a Federal Reserve (Fed) that is more willing to remain in crisis-fighting mode. As a result, real cash yields are now the most negative since TIPS were first issued and have supported TIPS prices this year despite the move higher in longer-term Treasury rates.
A steady string of record-high equity market closes, credit spreads near the post-financial-crisis tights and yields on TIPS in deeply negative territory indicate the Fed’s policy of devaluing cash to push investors out the risk curve is working as intended. Even though fixed-income investors are increasingly buying into the transitory inflation messaging from the Fed, mounting inflation risks are likely to force the Fed’s hand to tighten more quickly than markets are expecting today, moving yields on TIPS higher in the process.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.