The iShares TIPS Bond ETF (TIP) is at an important inflection point as the next Fed meeting approaches. The TIPS Bond ETF serves as an important indicator (and investment offering) for investors to follow. Below are some reasons why investors should take note of the TIPS Bond ETF.
But first, let me thank fellow See It Market contributor David Fabian of FMD Capital Management (@fabiancapital) for collaborating with me on this post. He consistently provides great information on bonds and related fixed income products. Note that his insights played a big role in the fundamental commentary within this post.
If you are not familiar, TIPS are essentially bonds meant to protect your purchasing power. How they calculate this via TreasuryDirect:
Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal is adjusted by changes in the Consumer Price Index. With inflation (a rise in the index), the principal increases. With a deflation (a drop in the index), the principal decreases.
The TIPS Bond ETF (TIP) has long underperformed the government treasury ETFs it tracks. Why? Well, you’ve probably already figured out that the inflation insurance component isn’t worth owning in a low-to-no inflation environment.
As you can see in the chart below, inflation expectations have fallen drastically and the bounces in this instrument are essentially aligned with the strength in its bond component. Notice the top panel showing the TIP relative performance to the 7-10 Year Treasury Bonds ETF (IEF).
TIPS Bond ETF (TIP) – Weekly Chart
After a sharp break in early 2013, TIP has risen in a weak manner along a very gradual trend.
The current price area is the most important level in the chart. Not only does it represent multi-year trend support, but the 111 level has been a horizontal support zone for over six months. Simply put, we’re at an inflection area in the interest rate and/or consumer price environment.
The hot button issue of late is whether the fed will continue on a path of raising rates. We’re not going to delve too deeply into hypothetical fundamental discussions, but the main argument for keeping rates where they are is the strong dollar and low inflation.
The Federal Open Market Committee announcement and press conference Wednesday, March 18 will be an important catalyst.
To conclude, the most important takeaways are:
- Another shift change in the rate and/or inflation picture may be upon us.
- A breakdown would hint at rising rates and/or lower inflation.
- The relationship between TIP and IEF will offer further clues to the direction of rates and inflation.
- There is little reason to be long TIPS during this current low inflation environment.
For more on the TIPS Bond ETF and this subject in general, be sure to read David’s blog post: Don’t Confuse Rising TIPS Prices With Inflation.
Thanks for reading!
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No positions in any mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
