Email of the day (1&2)
Comment of the Day

August 24 2011

Commentary by Eoin Treacy

Email of the day (1&2)

on the SPDR Barclays Capital TIPS ETF:
"I am surprised to find the fund IPE (Barclays TIPS fund) yielding 5.82% with I think a decent chart pattern, actually accelerating. It is composed of TIPS of fairly evenly spread maturities of 0-10 years. In light of the 10 year T bonds yielding only 2.12% or so, I wonder if this seeming good deal is too good to be true, or just the market's expectation of serious deflation ahead that will knock TIPS down? The acceleration of the chart pattern belies that analysis. Your insight is always valued."


"It seems one can't get good information. The financial website I quoted yield from (a world renowned name) has inaccurate data. The SPDR website lists the dividend yield as 4.01% and the average maturity of between 5.55 and 10 years, calculated three different ways! It all makes me resort to your number one tool, the price action."

Eoin Treacy's view Thank you for these observations which may be of interest to other subscribers. According to Bloomberg the 12-month yield for the SPDR Barclays Capital TIPS ETF is 4.04% while the indicated yield is 5.88%. This should help to explain the difference between the figures quoted in various services. Here is a list of the ETF's holdings. According to the SPDR website the Modified Adjusted Duration is 5.53 years while the Real Modified Duration is 8.72 years. Here is a link to a Wikipedia article explaining the concept of duration.

When making a judgment about a fixed income instrument one has to take relative value into account. While the TIPS ETF has an attractive yield and prices have advanced, the more important consideration is how it has performed relative to Treasuries of a comparative duration. Barclays 7-10 Year Treasury Bond ETF with an Effective Duration of 7.38 years may be a suitable instrument for comparison. This chart comparing the total return of the two funds depicts the outperformance of Treasuries relative to the TIPS since the onset of the credit crisis. This outperformance has increased substantially over the last month as the surge in Treasury prices has more than offset the additional yield offered by TIPS.

From this comparison, your initial interpretation of the price action would appear correct. Aggressive buying of Treasuries reflects investor fears of a recessionary environment and the Fed's intimation that short-term interest rates are going to remain ultra low for longer than many people thought. The current yield on TIPS suggests less concern about inflationary pressures. The low growth environments evident in the US and Europe coupled with continued monetary tightening across Asia support that view over the medium-term. In the short-term there is little evidence that energy, grain and bean prices are coming down.

The SPDR Barclays Capital TIPS ETF hit at least a short-term peak near 59 two weeks ago and continues to revert towards the mean. The iShares Barclays 7-10 Year Treasury Bond ETF accelerated higher from late July and has lost momentum somewhat over the last two weeks. A sustained move below 102 would break the progression of higher reaction lows and suggest a peak of medium-term significance has been reached.

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