As a follow-up to this idea of using TIPs to protect wealth, there is a legitimate concern that the funds have come too far too fast over the last year. As is clear from the weekly chart below (compliments of T), the buying has led to a parabolic-type run and an extremely high ADX ... normal signs that it is a good time to take profits off the table.
ottographs.com
This run has occurred in near mirror image to the collapse of the tech markets over the last year or so, with the negative correlation between the buying of TIP funds (at least this particular one, which is typical) and the Naz reaching significant levels.
ottographs.com
In addition, the correlation between this TIP fund and the 30yr bond has increased from 0.45 over the last four months to 0.85 over the last 2 months, and finally to an extreme of 0.95 over the last month (data not graphed).
All this leads to the question of whether one might expect that the TIPs are way overbought at this point, partly as a function of the recent "flight to quality." Without a doubt there has been some effect, and this is probably not the best moment in time to jump into one of these funds. However, I would argue that another major impact on the demand for these TIP instruments has to do with inflation expectations, which are only rising at the moment given the Fed's drastic easings and the likely impact of that on prices down the road. There also doesn't seem to be any "panic" buying of these funds (at least from the following chart), just slow and steady accumulation over the last 15 months or so, with the relatively illiquidity of the market perhaps accounting for recent increasingly steep trendlines.
ottographs.com
So where does that leave us? Well, I for one will be reducing my exposure to this instrument, which dominates my portfolio at the moment. I still think there is upside potential as long as the regular treasuries do not completely collapse, as the extreme correlations of the recent months between TIPs and normal treasuries appear to be driven mainly by the steady rise in treasuries -- on days when treasuries fell, the TIPs either didn't fall (as in today, where this particular fund tacked on 0.2%) or fell much less as a percentage. The risks, however, probably do outweigh the potential rewards -- especially if a decent rally begins in the Naz (even if it is of the snap-back variety). But, alternatives for safety are few ... cash being the main option at this point in time -- or maybe direct TIP purchase on-issue.
Now, if only there were a way to get short a little of these TIPs .... that might make an interesting gamble from the risk/reward perspective! |
