TIPs: As I Was Saying...

on august 17 I wrote on this blog and on seeking alpha

If TIPS Are So Bad, Why Do They Keep Going Up?

With 10 year tips at a real yield of around 1.1% and then year treasury bonds at around 2.95%, replacing tips with conventional treasuries means that inflation will have to remain below 1.85% over the life of the bond for the position to prove attractive. This is the implied inflation forecast in the treasury/tips yield curve. Historically an implied inflation forecast like this embedded in the treasury/tips differential has been considered a buy rather than a sell signal.for tips.

here's a 3 month chart of  tip the TIPS etf

This week the following happened in the tips market (wsj)

A combination of low interest rates and growing fears of rising prices enabled the U.S. government to sell inflation-protected Treasury bonds with a negative yield for the first time ever on Monday.

That means if inflation doesn't appear as investors expect, they could end up paying to lend money to the government.

The Treasury sold $10 billion of five-year Treasury inflation protected securities, or TIPS, at an auction on Monday with a yield of negative 0.55%.

The negative yield on five-year TIPS owes partly to the fact that nominal five-year Treasurys yield just 1.18%, which is barely higher than consumer price inflation for the past year.

The difference between regular Treasury yields and TIPS yields, often called the "breakeven inflation rate," is a rough measure of the market's inflation expectations for the future. That breakeven inflation rate has grown since the Fed made it clear it was going to restart its bond buying, an effort known as quantitative easing.

Paul Vigna discusses Monday's markets and why the yield for TIPS went negative for the first time ever.

In the case of five-year TIPS, the negative yield suggests inflation expectations of about

1.70%—hardly runaway inflation, but better than deflation.

and the wsj writes today of the future prospects:

TIPS to Top $100 Billion in 2011

The Treasury Department has ramped up TIPS supply since the start of this year, aiming to improve the market's size while getting a better handle on its large debt-sale program. TIPS account for around 7% of the overall Treasury market at $8.48 trillion.
Demand for TIPS has surged in recent weeks as many investors sought to hedge risks related to the Federal Reserve's expected plan to buy bonds, known as quantitative easing. Some fear the plan will stimulate longer-term inflation as it tries to bolster the struggling U.S. economy. The value of TIPS rises along with increases in consumer prices, while inflation erodes the return on conventional bonds.
Top fund managers at Vanguard Group Inc. and Pacific Investment Management Co., two of the world's top five investors of TIPS, expect TIPS sales next year to hit $120 billion. That thought is echoed by Michael Pond, co-head of U.S. rates strategy at Barclays Capital Inc., the world's largest dealer of TIPS.
Sales have already jumped to $76 billion so far this year, up from $58 billion for all of 2009.
"The Treasury would like a viable and liquid TIPS program because having a reasonable sized TIPS issuance program gives the government inflation-fighting credibility, plus a liquid real time measure of inflation expectations," said Mihir Worah, who manages the $18.7 billion Real Return Fund at Newport Beach, Calif.-based Pimco, a unit of Allianz SE.
Kenneth Volpert, who co-manages $32.4 billion in Vanguard Inflation-Protected Securities Fund, the world's largest TIPS fund, said that the more auctions, the more trading and liquidity will be in the market, which will help increase TIPS's allure with a wider audience.
Individual investors are still the main TIPS players. But this year, institutional investors—including foreign central banks, mutual funds and hedge funds—have become more actively involved. The growing market offers both fresh trading opportunities and diversification for portfolios dominated by conventional fixed-income securities.