Rabu, 10 Oktober 2012

TIPS point to very weak economic growth

TIPS are complex securities that only reveal their true message upon careful consideration of a variety of factors. A casual glance at the fact that every TIPS issue out to 20 years' maturity is trading at a negative real yield—with 5-yr TIPS trading at -1.62%—would lead one to think that demand for TIPS must be intense, and that therefore, the market's desire for a hedge against inflation (which TIPS are designed to be) must also be intense, and that therefore the bond market must be extremely worried about inflation. But that would be wrong.

The chart above compares the real yield on 5-yr TIPS with the nominal yield on 5-yr Treasuries. The difference between the two is the market's expected annual rate of inflation over the next 5 years. While inflation expectations have indeed risen of late, they are not greatly different from what they have been over the past 15 years. There is no real inflation message to be found here; inflation expectations are up, but they aren't unusual.

The true message of TIPS can be found in the chart above. The negative real yield on TIPS is not a message about inflation expectations, it's a message about real growth expectations. When the real yield on TIPS is negative, as it is today, it's because the bond market holds very dim expectations for real growth in the years to come. This chart suggests that the bond market is calling for growth to be essentially zero over the next two years. That's just my interpretation, of course, but if the market expected real growth to be improving, then it wouldn't also expect the Fed to be on hold, and short-term rates to be close to zero, for the next several years, as it now does.

This reiterates the point I've been making for a long time: the market has very pessimistic assumptions about the future of economic growth. Therefore, if growth fails to be as weak as expected, then optimists will be rewarded. The bar for growth and optimism is set very low these days. I think the economy can beat those dismal expectations, which is why I remain optimistic.

Tidak ada komentar:

Posting Komentar