Treasury Seeks Advice From Banks On the Decline of TIPS

The Treasury is seeking advice from securities-dealing banks on the decline of Treasury inflation protected securities (TIPS). The 2013 year has been a rough year for TIPS. Recently TIPS mutual fund flows recorded a third quarter loss of 301 million dollars. TIPS overall have been performing very well since the financial crisis. As a result the Treasury has been issuing more TIPS over the years. The Treasury issued 149 billion dollar’s worth of TIPS last year in comparison to 58 billion dollar’s worth of TIPS which were issued in 2009. There is now a concern by the Treasury that they have oversupplied the market with TIPS. The Treasury has asked the banks this month to "comment on the current supply and demand dynamics in the TIPS market including liquidity conditions." The main reason for this is the rise in inflation adjusted interest rates. This has resulted in higher yields which contribute to lower prices and smaller annual returns. The 10 year TIPS yields have surged from negative .66% to .42% since May. Analysts believe that the rises in interest rates are due in part to the improving economy. Since the financial crisis the Fed has opted to go with an easy monetary policy. As a result the Fed has kept interest rates down and used different stages of Quantitative Easing (QE) to help stimulate the economy. The Fed will stop QE in 2014 and will likely opt to go with a tighter monetary policy. This will likely lead to a rise interest rates which can hurt returns on TIPS. Investors are taking notice of this and have pulled 13.1 billion out of TIPS funds since July 10th. Another example of how weak the investor appetite is for TIPS only .4% of the 7 billion 30 year TIPS auction in late June were purchased by direct bidders which is the lowest on record. The Treasury could decide to cut back on TIPS if the demand from investors isn't there, but some argue against this and say that reducing supply would backfire. According to Bob Tzucker "We've seen over time that the more Treasury issues in TIPS, the better the liquidity because more people get involved and trading volumes increase." Others say that investors are just "jittery" right now because of the recent trends in the economy and that TIPS sales will eventually increase when investors are more confident on where the market is heading.

 https://pressroom.vanguard.com/nonindexed/TIPS_inflation_protection_still_has_risks.pdf

 http://online.wsj.com/article/SB10001424127887323664204578608093706355204.html