First-Ever TIPS Auction at Negative Yield: What It Means

[jedi]

The FEDs are offering a TIPS bond with an interest rate of -.55 percent.
Note this is NOT a type-o. That is interest rate with a NEGATIVE .55 percent! So you give the FEDs $105.50 today and in five years when the bond matures yo get $100. You could get $105 if the CPI rises by 5% however.

Nice hu?

Read all about it here:
TIPS-at-negative-yield-what-it-means: Personal Finance News from Yahoo! Finance

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[dom1104]

And this means......

 

[jedi]

I'm not fully sure as the TIPS is a special type of US Bond not like what most people are use to seeing/hearing/reading about (ie. the paper bonds). I'm trying to look up more information but at this point I don't see why anyone would give anyone $105.50 today with the promise that the borrower will either give me back $100 in five years of IF the CPI goes up 5% I will get back $105. In either case I'm still LOSSING money!

So from a laymens terms it's not a good deal to buy these types of bonds unless you are looking to make a loss.

Someone with more financial knoweledge care to post?

 

[leftsock]

Well, it doesn't "mean" anything. If you're buying TIPS at a -.55% interest rate, you're betting that at even that loss, inflation will rise enough to generate a positive return for you.

When there's widespread concern over deflation and economic contraction, investors might go so far as to accept negative returns. If you think a dollar today might only be worth 96 cents in two years, an investment that guarantees you 98 cents in two years might appear to be a good deal.

and

At the end of the day, TIPS are a bet on relative performance. Investors are betting that the value of these bonds will deteriorate less than those of other low interest-paying bonds if inflation picks up.

 

[jedi]

Well, it doesn't "mean" anything. If you're buying TIPS at a -.55% interest rate, you're betting that at even that loss, inflation will rise enough to generate a positive return for you.

and

But I'm still lossing out $0.50 even if the inflation goes up. So how does that make sense.

 

[leftsock]

... I don't see why anyone would give anyone $105.50 today with the promise that the borrower will either give me back $100 in five years of IF the CPI goes up 5% I will get back $105. In either case I'm still LOSSING money!

If the CPI goes up more than 5%, then you're generating a profit.

 

[indyjoe]

But I'm still lossing out $0.50 even if the inflation goes up. So how does that make sense.

Even if inflation does rise, you are buying with $105.50 of better dollars (worth more) than the $105 you get back that is worth less. Something that you could buy for the $105.50 would cost $111 after it is done, if we had 5% inflation.

 

[leftsock]

But I'm still lossing out $0.50 even if the inflation goes up. So how does that make sense.

IF inflation/CPI shoots through the roof, you win big.

 

[shibumiseeker]

But I'm still lossing out $0.50 even if the inflation goes up. So how does that make sense.

I listened the the Marketplace report on that last night and it made my head spin. Folks must think they can make money at it otherwise folks who are pretty smart with their money wouldn't be doing it.

Me, I don't make enough to worry about it. I'll stick with buying land and other tangible assets.

 

[ATOMonkey]

It's an inflation protected treasury, which means that people are hedging against inflation, that's all. And it's not a bad strategy when the Federal Reserve annouces that they're going to print $3T this week.

 

[jedi]

Even if inflation does rise, you are buying with $105.50 of better dollars (worth more) than the $105 you get back that is worth less. Something that you could buy for the $105.50 would cost $111 after it is done, if we had 5% inflation.

IF inflation/CPI shoots through the roof, you win big.

ok the light bulb just turned on! It's a gamble that inflation is going to go up MORE than 5% in the next 5 years. Oh that's not kool @ all but then again the talk of hyper-inflation I have heard on these boards a lot as well.

 

[ATOMonkey]

Hyper-inflation is not inflation on steriods. It is basically the collapse of a currency. At which point, the TIPS would be just as worthless as the dollars the government may or may not pay you for them.

10% or 20% inflation would not be hyper-inflation.

 

[dross]

The fact that some smart investors are buying these is a sign that they expect the quantitative easing measures by the Fed are going to create inflation.

This is a last gap by the Fed to attempt to make something happen with the economy. The low interest rates haven't done it. What I don't understand is how they don't realize that because the regulations they've made has made money so hard to get, even though it's cheap, and other regulations are keeping the housing prices in decline, all the low interest rates in the world aren't going to move anything.

It would be funny if it wasn't sad.

 

[ATOMonkey]

That and no one has any idea what the long term picture looks like.

Even basic things like health insurance, and long term care insurance are on the verge of being nationalized or not depending on who you talk to.

We don't know what's going to happen with Cap and Trade. Is there going to be a carbon credit exchange?

Hell, the currency isn't even stable. How am I going to spend money if I have no idea what it will be worth?

Uncertainty kills economic growth just as much as a bad policy that people are certain of. Even then, as long as you know what the rules are you can play the game to the best of your ability. Right now, no one knows what the rules are, so we're all just idling until things settle down.

 

[E5RANGER375]

what about all the tax money we already give them that they use illegaly, or to fund their extravagant trips, lunches, etc? now they are just getting more brazen about it.

-1 U.S. Government

^ put that s*** on a t-shirt or roll it up and smoke it

 

[The Bubba Effect]

I do not believe that anyone is investing in TIF's with the hopes of "making money" or "hitting it big".

Sure, if inflation really takes off, you would get more dollars back, but those dollars would have their buying power reduced proportionally, so it would be a wash.

Basically, people are taking X dollars that would buy Y loaves of bread today (or rounds of ammunition, or widgets, whatever) and "investing" it with the government, on the condition that, in five years, they will get back in five years the dollar equivalent of what it will then cost to purchase Y - .55% loaves of bread/widgets/whatever.

In other words, people are getting so freaked out by the prospect of looming inflation/market instability that they are willing to give up the use of their money for 5 years with the hope that they will only lose .55% of their purchasing power for the amount invested.

It's like paying the schoolyard bully a small portion of your lunch money to have him just punch you in the stomach rather than risk him beating you severely and taking all of your money.

It's grim.

 

[dross]

I do not believe that anyone is investing in TIF's with the hopes of "making money" or "hitting it big".

Sure, if inflation really takes off, you would get more dollars back, but those dollars would have their buying power reduced proportionally, so it would be a wash.

Basically, people are taking X dollars that would buy Y loaves of bread today (or rounds of ammunition, or widgets, whatever) and "investing" it with the government, on the condition that, in five years, they will get back in five years the dollar equivalent of what it will then cost to purchase Y - .55% loaves of bread/widgets/whatever.

In other words, people are getting so freaked out by the prospect of looming inflation/market instability that they are willing to give up the use of their money for 5 years with the hope that they will only lose .55% of their purchasing power for the amount invested.

It's like paying the schoolyard bully a small portion of your lunch money to have him just punch you in the stomach rather than risk him beating you severely and taking all of your money.

It's grim.

Maybe it will convince the Fed to back off on their QE plans next week.

 

[ATOMonkey]

They're starting to waffle, but I bet that $3T still ends up in mix.

 

[Woodsman]

IF inflation/CPI shoots through the roof, you win big.

In Jimmy Carter terms that's what, about 17-20% minus 5%? If you get paid, that's not bad money for just parking it.

 

[Johnny C]

Actually, at the current inflation rate, -5% isnt that bad a yield