TREASURY INFLATION PROTECTED SECURITY

Given several years of weak economic growth, analysts and investors speculate the US economy have changed dramatically. Forecasts for future inflation have receded as well. Based on a Bloomberg data, investors were expecting inflation of almost 2.5% over the course of the next decade. Also, projections for long-term inflation were about 2.25%.

These two predictions have paved a way for Treasury Inflation Protected Securities. This treasury security is indexed to inflation, countering the negative impacts of inflations. Considered an extremely low risk investment, the derivative is backed by the US government. Its par value escalates with inflation, while interest rates remain fixed.

As of December 1, 10-year TIPS breakevens were below 1.6% Although the rate is nominally above the multi-year low touched in late September, but it is way below the long-term 10-year breakeven average of around 2%. The decline in inflation expectations corresponds to a similar recalibration among consumers.

The sluggish economic recuperation has somewhat contributed to lowered inflation projections among consumers and investors. However, there is some evidence the rapid slump in oil also contributed. The benchmark WTI has dropped by almost 55%.

As consumers and investors are constantly exposed to the gasoline’s price action, the decrease in oil may have disproportionately influenced cognizance about inflation. Here’s why: referring to a Bloomberg data, the fall in oil prices indicates nearly 80% of the variation in 10-year inflation perceptions since the third quarter of 2015.

Are inflation views underrated?

US inflation, excluding food and energy prices, has been much stable than the headline figures. As of present, the consumer price index is at 1.9% year over year, its highest since June 2014. Looking from an economic view, today’s inflation anticipations may be unrealistically low. Inflation may not surge anytime soon, but the inflation itself and projections may stabilize.

So, is it worth investing in TIPS? Definitely, as it could help alleviate the risk coming from rising inflation.