Inflation TIPS: Living On The Hedge

Author: , Post Date: August 14, 2020
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Rida Morwa quotes John R. Mousseau in a recent commentary, dated August 14, 2020 on Seeking Alpha

Cumberland Advisors John Mousseau

Excerpt follows:

There are two major risks of TIPS. The first is that the inflation rate it’s tied to is calculated by the CPI which is a government calculated index. While we are not in the conspiracy theory category, there’s always a risk that CPI could understate actual inflation and hence you would not get the real benefit of TIPS. CPI also weighs components of inflation in a way that may not be representative of your own circumstances, and hence even in case of an accurate calculation, you may still lose out.

The other big risk here is that current yields on TIPS are a bit ludicrous.

The auction went “pretty well,” according to Tom Simons, a money market economist at Jefferies in New York.

The direct bid was a little soft, which is not all that unusual in recent times,” he said, adding there was a strong take down on the indirect bid side. A rush into TIPS has pushed yields to near historic lows amid an uptick in inflation expectations. The 10-year TIPS yield was last at -0.881%. “With the amount of stimulus that’s out there, it’s hard to believe that there’s not some inflation that’s going to come out of this,” said John Mousseau, president and CEO of Cumberland Advisors. (Source: Reuters)

That was not a typo. The Negative 0.881% yield means that the first 0.881% of inflation gets you to nada. Of course if inflation does average 2% or 3% over the next 10 years you would still do far better than the 10-year bonds yielding under 0.55%. You need inflation to average 1.43% over 10 years to do identically well as the 10-year bond.

Read the full commentary at Seeking Alpha: https://seekingalpha.com/article/4368045-inflation-tips-living-on-hedge


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