Good news, especially for retirees: Inflation has fallen.
The official rate has just tumbled to 6.5% — down from 9.1% last June. And while 6.5% is still a hefty hike in prices, that’s just the annual rate, comparing prices in December with those a year earlier.
When we look at the latest month-over-month changes, which tell us more clearly what is happening to prices in real time, the figures look better. Consumer prices overall in December were actually 0.1% lower than in November. Even when you strip out tumbling fuel prices, the monthly increase was about 0.3% — which works out at around 3.6% a year.
No wonder Wall Street is cheering. Everything is up: Stocks, bonds, gold, even bitcoin.
But falling inflation makes me want to buy inflation-protected bonds more than regular bonds. And for a very simple reason.
While inflation has fallen, it hasn’t fallen anywhere near as much as the regular bond market seems to be pretending.
So the 5-year Treasury bond is paying a fixed rate of interest of 3.5% a year. Meanwhile the 5-year inflation-protected TIPS bond is paying inflation (whatever it turns out to be) plus 1.3% a year.
The gap between the two is 2.2%. What that means: The regular bond will only be a better bet than the TIPS bond if the average inflation rate over the next five years is less than that.
The numbers are similar for longer-term bonds. The regular 10-year Treasury note, the one everyone talks about on TV, is now offering 3.4% annual interest. The 10-year TIPS bond: 1.2%. Once again, the gap is about 2.2%.
Do I want to make a bet that inflation will average 2.2% a year, or less, over the next 10 years? I do not.
I can’t even see a good reason why I would want to. To answer the obvious pushback: Yes, of course it might come in below that. It might even come in well below that. If a hedge-fund manager wants to take that bet, good luck to them.
I’m talking about whether I want to make that bet with my own money. In the “safe,” fixed interest part of my portfolio.
The potential gain from the bet is massively offset by the risks.
So at this point I would much rather own a TIPS fund, like iShares TIPS Bond ETF
TIP,
-0.78%
or Vanguard Inflation-Protected Securities
VAIPX,
-0.63%
than nominal Treasurys.
Ruffer & Co. money manager Steve Russell told MarketWatch and Barron’s Live, that his firm views long-term TIPS bonds as a recovery play. If inflation continues to fall, you’d expect interest rate expectations to fall as well. That will presumably be good for all bonds—whether regular or inflation-protected.
(To put this in context: In late 2021, when nobody was really worried about inflation and the markets were booming, the long-term TIPS ETF
LTPZ,
-2.16%
was 50% higher than it is today.)
On the other hand if inflation bounces back, I’d rather be holding a piece of paper guaranteeing to protect me against inflation than a piece of paper guaranteeing not to.
Inflation has fallen. Is it time to buy inflation protected bonds?
Good news, especially for retirees: Inflation has fallen.
The official rate has just tumbled to 6.5% — down from 9.1% last June. And while 6.5% is still a hefty hike in prices, that’s just the annual rate, comparing prices in December with those a year earlier.
When we look at the latest month-over-month changes, which tell us more clearly what is happening to prices in real time, the figures look better. Consumer prices overall in December were actually 0.1% lower than in November. Even when you strip out tumbling fuel prices, the monthly increase was about 0.3% — which works out at around 3.6% a year.
No wonder Wall Street is cheering. Everything is up: Stocks, bonds, gold, even bitcoin.
But falling inflation makes me want to buy inflation-protected bonds more than regular bonds. And for a very simple reason.
While inflation has fallen, it hasn’t fallen anywhere near as much as the regular bond market seems to be pretending.
So the 5-year Treasury bond is paying a fixed rate of interest of 3.5% a year. Meanwhile the 5-year inflation-protected TIPS bond is paying inflation (whatever it turns out to be) plus 1.3% a year.
The gap between the two is 2.2%. What that means: The regular bond will only be a better bet than the TIPS bond if the average inflation rate over the next five years is less than that.
The numbers are similar for longer-term bonds. The regular 10-year Treasury note, the one everyone talks about on TV, is now offering 3.4% annual interest. The 10-year TIPS bond: 1.2%. Once again, the gap is about 2.2%.
Do I want to make a bet that inflation will average 2.2% a year, or less, over the next 10 years? I do not.
I can’t even see a good reason why I would want to. To answer the obvious pushback: Yes, of course it might come in below that. It might even come in well below that. If a hedge-fund manager wants to take that bet, good luck to them.
I’m talking about whether I want to make that bet with my own money. In the “safe,” fixed interest part of my portfolio.
The potential gain from the bet is massively offset by the risks.
So at this point I would much rather own a TIPS fund, like iShares TIPS Bond ETF
-0.78%
-0.63%
TIP,
or Vanguard Inflation-Protected Securities
VAIPX,
than nominal Treasurys.
Ruffer & Co. money manager Steve Russell told MarketWatch and Barron’s Live, that his firm views long-term TIPS bonds as a recovery play. If inflation continues to fall, you’d expect interest rate expectations to fall as well. That will presumably be good for all bonds—whether regular or inflation-protected.
(To put this in context: In late 2021, when nobody was really worried about inflation and the markets were booming, the long-term TIPS ETF
-2.16%
LTPZ,
was 50% higher than it is today.)
On the other hand if inflation bounces back, I’d rather be holding a piece of paper guaranteeing to protect me against inflation than a piece of paper guaranteeing not to.
Source: https://www.marketwatch.com/story/inflation-has-fallen-is-it-time-to-buy-inflation-protected-bonds-11673611552?siteid=yhoof2&yptr=yahoo