TIPS Trumping Traditional Treasuries?
July 06, 2009
|
Page 3 of 4
Bond Market Review
Outside of conventional Treasuries, 2009 has been a rewarding year for investors in a number of fixed income categories, including corporates (especially high yield), emerging markets bonds, municipals, and TIPS. Credit markets have shown steady improvement since November 2008, when the Fed began to apply unprecedented support measures. Corporate bond yields and spreads to Treasuries are now near their 52-week lows. This is in contrast to stock prices, where the broad equity benchmarks remain 20-30% below year-ago levels. The 1.25% rise in the 10-year Treasury yield in 2009 is more a function of the normalization of credit markets, and the stabilization of financial markets generally, than any immediate worries over the ability of the The current 10-year Treasury yield of 3.5% cannot be described as a runaway rise in government bond yields. (That may come down the road if the government doesn’t get on a path toward more fiscal responsibility). The 10-year Treasury yield started 2009 at a multi-decade low of 2.25%. The increase in Treasury bond yields year-to-date can be explained by a normalization in longer-term inflation expectations. The spread been nominal 10-year Treasury yields and comparable-maturity TIPS yields has increased from approximately 0.25% at the start of the year to 1.65% currently, reflecting a 1.4% increase in expected CPI inflation over the next decade. We think actual inflation will exceed 1.65%, perhaps quite significantly, so TIPs continue to look more attractive than traditional Treasuries.
|
Previous Page
