Tuesday, June 25, 2013

Gold & TIPS (excerpt)

The 10-year Treasury bond yield is up 91bps from this year’s low of 1.66% on May 2 to 2.57% yesterday, the highest since August 8, 2011. The selloff in the bond market was initially triggered by mounting concerns that the Fed would start to prepare an exit strategy from its ultra-easy monetary policy if the US economy continued to improve and the unemployment rate continued to fall. Those concerns were heightened during Fed Chairman Ben Bernanke’s congressional testimony on May 22. They were confirmed in his press conference on June 19.

The increase in the 10-year nominal Treasury yield has been surpassed by the 10-year TIPS yield, which is up 126bps from minus 0.62% on May 2 to 0.64% yesterday. This yield has been abnormally low (i.e., negative) since the fall of 2011. It seems to be in the process of normalizing back into a range of 1%-2%. 

Investors buy TIPS as a hedge against inflation. They buy gold for the same reason. So it isn’t surprising to see that the price of gold is highly correlated with the inverse of the TIPS yield. Nevertheless, this year’s free-fall in the price of gold is astonishing. It is also astonishing how well it predicted the jump in the TIPS yield.

Today's Morning Briefing: Great Liquidation? (1) Half right, half wrong. (2) Why are bonds so TIPSy? (3) An astonishing correlation between gold and TIPS yield. (4) Inflationary expectations still falling. (5) Normalization is painful for bond investors. (6) Global credit crunch again? (7) EMs getting crushed. (8) Another bearish article on China. (9) EMs matter more than ever. (10) Can America succeed as it did in the 1990s? (11) Forward earnings at yet another record high. (More for subscribers.)

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