Comments on: Do TIPS Pose a Hidden Risk to Seekers of Inflation Protection? http://blog.alliancebernstein.com/index.php/2012/09/24/do-tips-pose-a-hidden-risk-to-seekers-of-inflation-protection/?utm_source=rss&utm_medium=rss&utm_campaign=do-tips-pose-a-hidden-risk-to-seekers-of-inflation-protection The AllianceBernstein Blog on Investing Wed, 22 May 2013 07:20:14 +0000 hourly 1 http://wordpress.org/?v=3.4.1 By: Doug Peebles http://blog.alliancebernstein.com/index.php/2012/09/24/do-tips-pose-a-hidden-risk-to-seekers-of-inflation-protection/#comment-18410 Doug Peebles Fri, 12 Oct 2012 13:44:25 +0000 http://blog.alliancebernstein.com/?p=2696#comment-18410 Your analysis looks correct. Over the recent period—which included the run-up to and announcement of QE3—the moderate rise in Treasury yields was explained by an increase in breakeven inflation rates, which can be considered a proxy for inflation expectations. TIPS yields actually fell during the period, generating positive returns and causing TIPS to outperform Treasuries. This is consistent with what the Fed is trying to accomplish in the short run: lower real rates by taking duration out of the market and increasing inflation expectations. However, when the economy begins to gain steam, it is highly likely that a good portion of any increase in nominal Treasury yields will be attributable to rising real/TIPS yields, even if inflation expectations are also rising. If this happens, longer-maturity TIPS would outperform similar-maturity Treasuries, but would generate weak or negative absolute returns. The longer the maturity of the TIPS, the more negative the return. Not exactly what investors may be thinking of when they are looking for an inflation hedge for their portfolios. Your analysis looks correct. Over the recent period—which included the run-up to and announcement of QE3—the moderate rise in Treasury yields was explained by an increase in breakeven inflation rates, which can be considered a proxy for inflation expectations. TIPS yields actually fell during the period, generating positive returns and causing TIPS to outperform Treasuries. This is consistent with what the Fed is trying to accomplish in the short run: lower real rates by taking duration out of the market and increasing inflation expectations.

However, when the economy begins to gain steam, it is highly likely that a good portion of any increase in nominal Treasury yields will be attributable to rising real/TIPS yields, even if inflation expectations are also rising. If this happens, longer-maturity TIPS would outperform similar-maturity Treasuries, but would generate weak or negative absolute returns. The longer the maturity of the TIPS, the more negative the return. Not exactly what investors may be thinking of when they are looking for an inflation hedge for their portfolios.

]]> By: Doug Peebles http://blog.alliancebernstein.com/index.php/2012/09/24/do-tips-pose-a-hidden-risk-to-seekers-of-inflation-protection/#comment-18379 Doug Peebles Thu, 11 Oct 2012 20:24:40 +0000 http://blog.alliancebernstein.com/?p=2696#comment-18379 The best way to understand what’s going on with any portfolio’s duration, in our view, is to look at the overall benchmark for the portfolio in question. You’ll see some portfolios that are managed to the Barclays Capital US TIPS Index; those would be strategies with a longer duration. However, other portfolios might be available that are managed to the Barclays Capital US 1–10 Year TIPS Index or benchmarks that are even shorter; those would be strategies with a shorter duration. The best way to understand what’s going on with any portfolio’s duration, in our view, is to look at the overall benchmark for the portfolio in question. You’ll see some portfolios that are managed to the Barclays Capital US TIPS Index; those would be strategies with a longer duration. However, other portfolios might be available that are managed to the Barclays Capital US 1–10 Year TIPS Index or benchmarks that are even shorter; those would be strategies with a shorter duration.

]]> By: DOUG GRIFFITH http://blog.alliancebernstein.com/index.php/2012/09/24/do-tips-pose-a-hidden-risk-to-seekers-of-inflation-protection/#comment-18112 DOUG GRIFFITH Sun, 07 Oct 2012 13:38:53 +0000 http://blog.alliancebernstein.com/?p=2696#comment-18112 Doug, I agree with the analysis, but I''m trying to correlate. Using the etf TIP as proxy and comparing with the 10 yr treasury. March, 2008 to November, 2008 had the 10 yr rise from 3.54 to 4.01 and TIP decrease from 110.57 to 92.37 - comparable rates of increase/decrease. Recently, the 10 yr was 1.43 on 7/25 of this year and is now at 1.75, but TIP has actually increased from 121.30 to 122.56? Any thoughts on current TIP pricing holding steady while 10 yr rates increase? Temporary mis-pricing? Greater inflation expectations?..thanks. Doug,
I agree with the analysis, but I”m trying to correlate. Using the etf TIP as proxy and comparing with the 10 yr treasury. March, 2008 to November, 2008 had the 10 yr rise from 3.54 to 4.01 and TIP decrease from 110.57 to 92.37 – comparable rates of increase/decrease. Recently, the 10 yr was 1.43 on 7/25 of this year and is now at 1.75, but TIP has actually increased from 121.30 to 122.56?

Any thoughts on current TIP pricing holding steady while 10 yr rates increase? Temporary mis-pricing? Greater inflation expectations?..thanks.

]]> By: tom gerger http://blog.alliancebernstein.com/index.php/2012/09/24/do-tips-pose-a-hidden-risk-to-seekers-of-inflation-protection/#comment-17665 tom gerger Fri, 28 Sep 2012 14:27:30 +0000 http://blog.alliancebernstein.com/?p=2696#comment-17665 Are there ETF''s or closed end products available with the shorter duration? Are there ETF”s or closed end products available with the shorter duration?

]]> By: Michael Rawlings http://blog.alliancebernstein.com/index.php/2012/09/24/do-tips-pose-a-hidden-risk-to-seekers-of-inflation-protection/#comment-17663 Michael Rawlings Fri, 28 Sep 2012 13:29:19 +0000 http://blog.alliancebernstein.com/?p=2696#comment-17663 How might your suggestion to sell long maturity TIPS now be different, for selling or holding the ETF, TIP? How might your suggestion to sell long maturity TIPS now be different, for selling or holding the ETF, TIP?

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