TIPS for the long run

  • US real yields are back at the post-GFC highs. We like allocating towards TIPS at prevailing real yields. 
  • According to the US treasury: “Historically, around 40% of TIPS issues have realized lower interest costs than nominal counterparts. The overall cost has been $80bln higher vs comparable nominal coupons.” 
  • For most of the TIPS market's existence (since 1997) the market has over-estimated inflation risks through the disinflationary regime.  
  • Given our structural Age of Scarcity thesis (financial repression, policy co-ordination between fiscal & monetary, fiscal expansion), we suspect a regime shift in the coming years where inflation starts to realize more than breakevens consistently.
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