Tuesday, October 20, 2009

If TIPS Are Going Higher, Then...

If Treasury Inflation Protected Securities (TIPS) are going higher, then yields on the 10 year Treasury bond are going lower.

See figure1 a weekly chart comparing the yield on the 10 year Treasury bond (symbol: $TNX.X) in the top panel to the i-Shares Lehman TIPS Bond Fund (symbol: TIP) in the lower panel. There is a clear inverse relationship between these two assets. Troughs in $TNX.X coincide with peaks in TIP. Peaks in $TNX.X coincide with troughs in TIP.

Figure 1. $TNX.X v. TIP/ weekly

I believe TIP is going higher, and I have presented my rationale in these three articles:

So if TIP is going higher, then yields on the 10 year Treasury must be headed lower.

And if yields on the 10 year Treasury are going lower, then equities have a good chance of unraveling. Treasury yields continue to diverge from the equity markets or to put it another way, the Treasury market is not discounting the economic recovery like the equity markets. See "Long Term Treasury Yields: Someone Is Going To Be Wrong". If the economy is recovering, then yields should be headed higher, but they are not. Equity bulls - those bull market geniuses - should be on high alert.


Anonymous said...

sorry son I normally agree with a lot of your rationale ,but if stocks correct and i think they are being distributed then I think you will find Tips go with them.Doesn't really matter if they are going up right now simple fact is moneyflow will go to conventional bonds ,not to TIPS if stocks do correct..think what we may have here with OIL,GOLD AND TIPS is a false breakout..because demand really doesn't support this ,only the USD weakness does that ,but that will bounce as well when time comes to take some profit from underlying assets.

Charts are good and they tell us a lot ,but never allow your brain to be told what to do by a chart going up like TIPS ...when the inter relationship says differently.

Thank you.

Guy M. Lerner said...


I will ignore the "sorry son" crack....

The relationship is pretty clear TIPS tend to do better in a falling equity market; and yes the implication of TIPS up, yields down would imply that money is going into conventional bonds - so I am not sure I see your beef

Why this is so might be this and worth considers: stocks go down; investors pavlovian response is more "liquidity" thrown on the fire; TIPS go up....just a thought

Lastly, false breakouts? Could be but we won't know until they fail; rather than second guess, I will put my chips on these horses. Plus oil and USD weakness have been poorly correlated; oil has done nothing from June to October while the dollar was trending lower

Anonymous said...

I vote you both are wrong.

Jason said...

Do you see any merit in the
"rotation" concept here where even if we continue to see the dollar fall we will not see silver and gold participate as speculators in those asset classes have begun to seek new opportunities in other commodities.
For example, I thought it was telling the other day when the dollar was down pretty big and silver and gold didn't really rally as much as they should have. This was the same day as the HUGE breakout in oil.
My guess is that evil speculators have gone to the oil trade again. $100 oil, here we come!

Guy M. Lerner said...

Hi Jason,

It does seem at time that the biggest junk or what has been down the most one week is up big the next.

Is this a sign of a lot of money chasing too few assets? This seems to be the consensus of many.

I am curious to see what happens to all assets when the music stops - that is when equities head lower. Is there going to be another sell everything kind of response? Will emerging markets fair better than the USA?

Dacian said...

"Is there going to be another sell everything kind of response?"

In any case, (almost) all goes up in the same time. Equities don't seem to care anymore about oil-the-economic-killer going up; in fact, it appreciates it (2 days ago it was a small exception).

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