Wednesday, March 23, 2016

"LPL: ‘Modest Stagflation’ Would Benefit TIPS"

For the last couple months we've been going on about inflation ticking up and the relative value in TIPS vs. treasuries. Here's a decent proxy, the iShares TIPS ETF, which seems to be digesting recent gains:
TIP iShares TIPS Bond daily Stock Chart
$113.43 up 17 cents. Closing that gap from Fed day would probably be healthy for the chart structure but it matters less than it would for a straight bond, or equity for that matter.

From Barron's Income Investing:
Stagflation — when inflation rises even as the economy remains stagnant — isn’t a very auspicious forecast for many investments. But it is good for Treasury Inflation-Protected Securities (TIPS), notes Anthony Valeri, strategist with LPL Financial in a Tuesday commentary.
He writes that the Federal Reserve created a “tailwind” for TIPS last week:
By signaling a more gradual pace of future interest rate hikes, and more tolerance for rising inflation, the Fed gave TIPS a tailwind. The development of modest stagflation—inflation readings remaining near current levels coupled with sluggish economic growth—may benefit TIPS.
Fed Chair Janet Yellen indicated in the press conference following last week’s meeting that she thinks recent gains to the core consumer price index may be temporary. But Valeri says that doesn’t mean investors shouldn’t consider buying some inflation protection in case she’s wrong.
He also points out that TIPS still price in a very low expected level of inflation, despite recent gains:
TIPS-implied inflation expectations remain low by historical context even after the recent increase. The rate of inflation implied by the current 10-year TIPS yield (calculated by subtracting the yield on a conventional Treasury from a comparable TIPS) is currently 1.6%, up from an overly pessimistic 1.2% in mid-February but still low by historical standards, leaving the potential for TIPS to benefit further from rising inflation protection....