US TIPS Market Sounds The Disinflation Alarm
Richard Leong, Reuters
BusinessInsider.com
Oct. 12, 2014
NEW YORK (Reuters) – For Federal Reserve officials already worried about a persistent lack of U.S. wage and price growth, one corner of the bond market may be suggesting even more reason for alarm. The Treasury Inflation Protected Securities (TIPS) market is suggesting price stagnation may be just around the corner.
Slowing global growth, particularly because of weakness in Europe, as well as a surging dollar and plunging oil prices, have spurred selling in TIPS since late summer, disrupting a comeback they had enjoyed in the first eight months of the year.
TIPS, which provide protection for investors against rising inflation, are closely watched because they feature a measure of inflation expectations called breakeven yields. Keeping inflation expectations steady is one of the Fed’s key goals.
Disinflation, or weak price growth, while not as harmful as deflation or a downward price spiral, hampers the economy as workers struggle to get bigger salaries and prices of assets, such as homes, appreciate only slowly. Fed officials, including Chair Janet Yellen, have repeatedly bemoaned the absence of wage growth for U.S. workers even as unemployment has fallen to the lowest since the financial crisis.
TIPS breakevens have been collapsing since early August. In the last three weeks, following the Fed’s most recent meeting and an unexpected monthly drop in the benchmark U.S. Consumer Price Index on the same day in mid-September, the downward momentum in breakevens has been at its most intense since the financial crisis.
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