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Investors love TIPS

By Sheyna Steiner ·
Wednesday, October 27, 2010
Posted: 4 pm ET

The search for yield is tough, but is it so tough that investors would flock to bonds with a negative yield?

On Monday, they did just that. At auction, $10 billion worth of Treasury Inflation-Protected Securities, or TIPS, were snatched up by investors paying $105.50 for the 0.5 percent coupon over five years, the New York Times reported.

On, Annie Lowery attributes this seemingly baffling situation to investors speculating on the next round of quantitative easing.

On Tuesday, her story, "Don't be so negative: Investors betting on inflation are doing strange things to the bond market," reported on the high-priced bonds sold the previous day.

The influx of money into the Treasury's inflation-fighting bonds was based on investors' speculation that inflation will be moving up over the next five years.

The value of TIPS is adjusted with inflation. As inflation goes up, so does the value.

As this Bankrate story reports, the Treasury adjusts the principal to account for changes in the Consumer Price Index. Interest is then paid on that adjusted amount.

Lowery writes, "Annual inflation for the next five years needs to be somewhere north of about 1.55 percent for the investors to break even."

Anything above that will be profit.  

That seems like a vote of confidence in the quantitative easing plan that may be announced at the November meeting of the Federal Open Market Committee.

Would you be willing to bet on inflation increasing over the next five years?

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Blake Templeton
November 02, 2010 at 5:32 am

The reality is unless we know what is available to us, we will continue doing the same investments hoping for a better result.

October 29, 2010 at 3:15 pm

As along time bond buyer, I too am baffled by the TIPS purchasing. It is safe and they should not lose money unless the FED QE2 results in depressing interest rates even more and forestalling any inflation beyond 5 years. Meanwhile, back on the ranch, stocks are a screaming buy. Low PEs, reasonable dividends, good earnings outlook. Heck it cannot get much worse so it will probably go up. Frankly I am tired of being frugal and pulling back. Let all spend a little and watch the economy pick up.

John Hunter
October 28, 2010 at 10:50 am

Investors may be like me, trapped in 401(k)s with very bad money market options. TIPS are the least bad way to try and have some funds outside the market (for those of use that believe long term rates on unreasonable low and that inflation will pick up).