Thursday, September 13, 2012

TIPS Are A Lousy Predictor Of Future Inflation

From the Wall Street Journal:
Uncle Sam Has an Inflation Deal for You
...But, much the way investors reacted to previous announcements of quantitative easing, nervousness about the Fed's two-day meeting that concludes Thursday is probably overdone, says Carlos Pro, an inflation-linked bond strategist at Credit Suisse.

For that reason and others, Mr. Pro says the common belief that TIPS are a good predictor of inflation is misplaced. For example, implied inflation over 30 years is about the same as 10 years, but it should be higher.

Perhaps the oddest thing about TIPS, though, is that they aren't even pricier, whatever the Fed's immediate plans. Today's 2.39% break-even rate over 30 years not only is well below the actual average inflation rate of 3.8% since 1950. It also ignores a nightmare scenario for owners of traditional bonds: that America's unsustainable fiscal trajectory ends in hyperinflation....