Why Have the Yields on TIPS Been Negative in the Past Two Years?
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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?
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Paul L. Kasriel
AuthorMore in Author Profile »Mr. Kasriel is founder of Econtrarian, LLC, an economic-analysis consulting firm. Paul’s economic commentaries can be read on his blog, The Econtrarian. After 25 years of employment at The Northern Trust Company of Chicago, Paul retired from the chief economist position at the end of April 2012. Prior to joining The Northern Trust Company in August 1986, Paul was on the official staff of the Federal Reserve Bank of Chicago in the economic research department. Paul is a recipient of the annual Lawrence R. Klein award for the most accurate economic forecast over a four-year period among the approximately 50 participants in the Blue Chip Economic Indicators forecast survey. In January 2009, both The Wall Street Journal and Forbes cited Paul as one of the few economists who identified early on the formation of the housing bubble and the economic and financial market havoc that would ensue after the bubble inevitably burst. Under Paul’s leadership, The Northern Trust’s economic website was ranked in the top ten “most interesting” by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets (McGraw-Hill, 2002). Paul resides on the beautiful peninsula of Door County, Wisconsin where he sails his salty 1967 Pearson Commander 26, sings in a community choir and struggles to learn how to play the bass guitar (actually the bass ukulele). Paul can be contacted by email at econtrarian@gmail.com or by telephone at 1-920-559-0375.