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Economy in Brief

Why Have the Yields on TIPS Been Negative in the Past Two Years?
by Paul L. Kasriel  May 3, 2022

Treasury Inflation-Protected Securities (TIPS), which are marketable securities, compensate the investor for inflation by marking up/down the principal of the outstanding security every six months by the six-month CPI inflation/deflation rate. The fixed coupon rate on the originally-issued TIPS is applied to the adjusted principal every six months. If you want to know the full skinny on TIPS, Google treasurydirect.gov. But what I want to discuss is the negative yield on TIPS starting at or about the time of Covid-induced March-April 2020 recession (the red and blue lines in the chart below.) Why have TIPS yields continued to remain negative since the Covid recession? I think the answer lies in the green bars in the chart. Each green bar represents the 24-month dollar change in Fed holdings of TIPS as a percent of the 24-month dollar change in total outstanding TIPS. In the 24 months ended July 2020, the dollar change in Fed holdings of TIPS was greater than the dollar change in total TIPS outstanding, as represented by the green bar being over 100%. The green bars have continued to be above 100% through February 2022. In recent months, the Fed has been “tapering” its purchases of securities, including TIPS. But in the 24 months ended July 2020 through the 24 months ended February 2022, the Fed has been buying all of the TIPS being issued by the Treasury and then some. With a price insensitive purchaser like the Fed buying more than 100% of the new issues of TIPS is it any wonder that the yields on TIPS have been negative? Starting any day now, the Fed is going to turn into a net seller of TIPS. TIPS yields already have moved up close to zero. When the Fed begins to sell them, TIPS yields almost assuredly will rise above zero and rise rapidly. Wonder what will happen to the yield on mortgaged-backed securities when the Fed starts to unload these too?

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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