Wednesday, October 8, 2008
Can't resist posting this chart, to follow up on my earlier post below. The big rise in TIPS yields is hard to explain or understand. Here is a bond guaranteed by the US government to pay you a real yield of almost 3% per year if you hold it to maturity. Whatever your forecast of the economy or the market, the only thing that can go wrong with this investment is the collapse of our government. And if that happens, heaven help us because nothing is going be guaranteed at all. We saw higher real yields in 2000, but that was back when nobody was looking; TIPS were still largely unknown, and not very liquid. There is a limit to how high guaranteed real yields can go, I believe, and that's because the higher they get the more they beat every other investment on the planet in risk-adjusted terms. That also means that the downside risk to owning TIPS (due to rising interest rates) is getting increasingly very limited.
Posted by Scott Grannis at 4:38 PM