The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Looking in the TIPS Jar

04/26/2010

TIPS are Treasury Inflation Protected Securities. They are issued by the U.S. Treasury and have the “full faith and credit” of the United States government. Of all bonds issued by the Treasury for any given maturity, TIPS pay the lowest interest rate, because they are “inflation-protected”, which means they pay extra to keep the purchasing power of the bonds roughly equal to inflation. For investors concerned with inflation, this is attractive, because the low interest they receive is AFTER inflation.

Today, the Treasury auctioned off $11 billion of 5-year TIPS. Normally, they receive bids to buy about 2.2 to 2.4 times the amount of TIPS being offered. Today, there was 3.15 times. In other words, the government could have sold 3.15 as much as they had ti sell. It was the best since October of 1997.

This is a huge difference and strongly suggests more people are getting worried about inflation. One of the biggest fears of Fed Head Ben Bernanke is an increase in inflationary expectations, because those inflationary expectations completely become a self-fulfilling prophecy, actually creating inflation and requiring Bernanke to start raising interest rates sooner than he would like.

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