Tags: TIPS | QE | Fed | Treasury

Barron’s: TIPS Confirm Commodities’ Deflationary Signal

By John Morgan   |   Tuesday, 23 Apr 2013 07:52 AM

Falling commodity prices may paint a picture of deflation in the U.S. economy, but a more obscure measure of inflation-adjusted Treasury securities confirms the trend, according to Barron’s.

Among the financial data that receives Fed focus is Treasury Inflation-Protected Securities (TIPS), which are adjusted for the consumer price index (CPI) so they pay a “real” yield on top of the CPI rate.

Recently the real yield has been negative for shorter TIPS since regular Treasurys yield less than the current rise in the CPI, Barron’s said.

Editor's Note:
Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

“This may sound like inside baseball for bond geeks, but the so-called TIPS break-even spread — the difference between regular Treasury and TIPS yields, which represents expected inflation — is closely watched by the Federal Reserve,” Barron’s stated.

Research from broker-dealer International Strategy and Investment (ISI) showed that when that break-even spread has threatened to decline beneath the Fed’s 2 percent inflation target in the past, the Fed has initiated monetary stimulus.

But the ISI analysts said the Fed also adds a measure of inflation expectations five years out to its TIPS break-even analysis and “they don’t think the central bank is worried enough” to boost its current $85-billion-per-month bond purchases.

“Even though a pickup [in bond purchases] is unlikely, this represents a huge reversal of recent speculation that the Federal Reserve would begin to throttle back its securities-purchase program,” Barron’s said.

“Bet on the QE3 [third round of quantitative easing] buying to continue through the end of the year, at a minimum. And the 0 percent to 0.25 percent target for overnight federal funds, in place since the crisis days of December 2008, most likely will extend beyond next year into 2015, as the Federal Open Market Committee indicated in its projections at its March meeting.”

Barron’s said a “global deflationary wave” has swept through the commodities and bond markets, featuring notable drops in metals and oil prices, event as the International Monetary Fund lowered is global growth projections and U.S. economic data has turned weaker.

Barron’s concluded the Fed’s QE3 continues to benefit the stock market more than it does the overall economy.

MarketWatch reported the Treasury Department last week sold $18 billion in 5-year TIPS — its largest ever TIPS offering at that maturity — at a yield of -1.311 percent.

However, bond guru Bill Gross appeared to be headed back into TIPS even as other investors jumped out.

"Buying TIPS," Gross wrote on Twitter on Friday. Gross, co-CIO of fund giant Pimco, wrote, "Foreign $ reserve countries need protection.”

Reuters reported futures exchanges would embrace a cutback in QE3 because their profits have suffered from declining trading volumes in bonds.

CME Group's Chief Economist Blu Putnam predicted an end to the Fed's policy would boost volatility in Treasuries, according to a video posted on CME's website on Thursday.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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