Inflation TIPS: Living On The Hedge

Author: , Post Date: August 14, 2020

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:

Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites. Sign up for our FREE Cumberland Market Commentaries Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.

cumber map
Cumberland Advisors® is registered with the SEC under the Investment Advisers Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in the states where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services. Please feel free to forward our commentaries (with proper attribution) to others who may be interested. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.