Wednesday, February 17, 2010

TIPSy Doodle

We've been hearing for a while now that inflation may be just around the corner, especially given the huge debt our federal government has rung up. That's been a central driver of the strategy employed by Fed chairman Ben Bernanke, who is wary of pumping up the economy so much that he ends up unleashing inflation.

But the market seems to be discounting that possibility a bit. The sale of TIPS - Treasury Inflation-Protected Securities - have been falling lately, with investors seeming to find them overpriced. The great selling point of these Treasury bonds is that the purchaser is protected against losing value because of inflation, since their interest rate is pegged to the inflation rate. Of course, you pay a price for that kind of security; at the moment, you price you pay is 2.25 percentage points less than comparable Treasurys. In other words, if you think inflation is going to be higher than 2.25 percent, you might want to think about TIPS.

Investors, though, are shying away from TIPS at that price. Many big bond funds have been unloading TIPS recently, according to Bloomberg News. Bloomberg says the bonds are on pace for their worst month since October 2008, at the very start of the banking meltdown.

That's bad news for TIPS investors, but good news for people who are fearing inflation. Anyone can spout off with opinions about where inflation is headed, but when people begin putting their money where their mouth is, it's time to start paying attention.

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