Thursday, March 3, 2016

Inflation: TIPS Breakevens Start to Rise as Economic Data Improves

From Barron's Income Investing, March 2:

With Treasury yields rising (and yields move inversely to prices) while some stronger economic numbers are posted, some market strategists are starting to like Treasury Inflation-Protected Securities (TIPS) over Treasuries.
Barron’s noted that TIPS were “Cheap and Contrarian” in a Feb. 6 Current Yield column. Since then, the benchmark-tracking iShares TIPS Bond (TIP), has climbed in price about $1 to $112.39 as of mid-day Wednesday.
Fiera Capital’s Chief Investment Officer Jonathan Lewis commented Wednesday:
The continued firmness in oil, the better-than-expected economic reports, and the buoyancy of commodity currencies are all signaling a positive future for TIPS relative performance vs. nominal Treasuries. In the past few days we have seen data that confirms the economy is not slipping into recession, and in the days ahead we have a series of central bank meetings that are likely to add fuel to the “risk on” fire. Not only is oil up meaningfully since its bottom but so are the Canadian dollar, New Zealand Dollar, Norwegian Krone, the Mexican Peso and the Chilean Peso. These currencies are signaling that the dollar rally is fading, growth expectations are shifting into higher gear, and the outlook for China is brightening.
TIPS are getting this message loud and clear. While nominal Treasuries are down for the day, TIPS are down by a smaller amount. The market is saying inflation protection is valuable. While 5-Year TIPS break-evens are up from their low, they are only at 1.33 and still way down from the 2.40 level they reached in 2013. Given the acceleration of price pressures in yesterday’s ISM report, TIPS are still cheap and likely to outperform.
Manning & Napier’s Marc Bushallow is also lately a fan. He wrote a primer on TIPS last week... 

No Inflation? Look At This (#3 will shock you)
"The Treasury Market Raises Its Inflation Outlook" (buy TIPS)
The Velocity of M1 Money Stock May Have Stopped Declining
A Look At The Consumer Inflation Numbers
You Want Inflation, "Why doesn’t the ECB just buy oil?"