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How the Bond Markets React
A New Weekly Fixed Income Feature at the BlueCollarDollar

12.16.04

TIPS in the Right Direction

Although there is continuing debate as to whether inflation is really a factor, the fixed income investor, if their actions are to be followed, believes that there is a real danger ahead.

Evidence that these investors are finding inflation worth betting against can be found by subtracting the yield from Treasuries of similar maturity against the yield of Treasury Inflation Protected Securities or TIPS. For instance, based on last weekıs close of the ten-year note, the most popular measure of bonds, the spread had widened to 2.53%. That is a significant increase from the yearıs low point of 2.25%.

So what do these investors see? One of the first and easiest indicators that inflation has gained some ground recently is in the PPI or the Producer Price Index. Prices on this index, have jumped dramatically and are now at a fourteen year high. While this might be perceived as pricing power, investors in TIPS see it as a sign that securities that can be adjusted for inflation is the best place to park conservative money. The 12.10.04 report showed another month of increases especially among raw materials.

The Consumer Price Index or CPI has also seen gains even when food and fuel are excluded as they are in the core index.

Fixed income investors see this as a warning sign of future price increases. November report on the CPI is due this week and without much skill needed to predict that it will surely show continued gains in prices making TIPS a safe bet for the near and possibly long term future.