TIPS yield have turned negative for about a month. With the expectations of QE2 flooding the market, 5-year TIPS yields now post a negative -.23. You get a 50 bps coupon on the 5-year TIP, but you have to pay a price of 103-05 which means that you will pay the Treasury to hold your money for 5-years.
We know that TIP yields are tied to inflationary expectations. 5-year yields are at 1.51 percent so implied inflation rates are now set at 1.74 percent which is lose to the target rate for inflation at 2%. There does not seem to be a threat of inflation. Nominal yields are so low that you expect to lose on the real returns for these assets. Isn't this what the Fed wants? At negative yields, you will not want to save or hold these safe assets. You will want to buy riskier assets at higher yields or spend the money.
This is a perfect environment for investors to chase yields and create a bubble in riskier assets.
We know that TIP yields are tied to inflationary expectations. 5-year yields are at 1.51 percent so implied inflation rates are now set at 1.74 percent which is lose to the target rate for inflation at 2%. There does not seem to be a threat of inflation. Nominal yields are so low that you expect to lose on the real returns for these assets. Isn't this what the Fed wants? At negative yields, you will not want to save or hold these safe assets. You will want to buy riskier assets at higher yields or spend the money.
This is a perfect environment for investors to chase yields and create a bubble in riskier assets.
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