TIPS
June 26, 2020
–Not much to say about rate futures. Ten year yield locked just under 70 bps. TYU trading 138-29 this morning and July 139 calls expiring today trade 3, probably not even worth a look. Late yesterday the Fed limited banks’ dividends and banned stock buybacks as a result of stress tests. Given that share buybacks have been a major prop of the markets, I thought that news might be important. Nope. The WSJ had a blurb saying that stress could cause $700 billion in losses for banks. Does it really matter? The Fed is buying $80 billion in treasuries per month. Can’t print a few hundred billion to patch up the banks if things go sour?
–EDZ0/EDH1 slipped to a three month low settle of -9.5, down 1 on the day.
–News today includes Core PCE yoy prices expected 0.9% from 1.0 last. UofM long term inflation expectations provide a stark contrast, with the 1-yr at 2.6 and 5-10yr at 3.0. I suppose this is as good a time as any to delve into inflation-indexed note yields. I don’t know much about these securities. I seem to recall that one of my long commodity fund holdings had a big slug of tips in the portfolio, which makes some sense. IVOL, Quadratic’s Int rate vol and inflation hedge ETF has 86% of the portfolio in Schwab’s TIPS ETF. (The incestuous world of ETFs buying ETFs). I guess there can be all sorts of buyers for TIPS, but my point here is that there ARE buyers, as the ten-yr is making a new low yield of -67.5 (yesterday). This is closing in on the low in 2013 of -76 bps and the all-time low in 2012 of -91.6. The 30y tip, currently at -17 bps, made a new all-time low this year in April at -26.6. The five-yr is -81. Do we expect a ‘real’ yield of negative 67 bps for the next ten years? That forecasts a fairly bleak outlook. Sure, 2020 has had some challenges: pandemic, earthquakes, swarms of locusts (now in Argentina and Brazil), riots, and the Saharan dust cloud moving toward the US Southeast. But after this year, it should be smooth sailing. Right? Or is it that increases in CPI being foreshadowed by U of M and other sources are expected to overwhelm the negative yield?
