THIS BEING A DEFLATIONARY EPOCH:

It wouldn't be until 1997, curiously, when inflation-indexed Treasury bonds formally made their American reappearance. The late nineties were hardly a time like the 1970's let alone the three thousand percent inflation of the late 1770's. There's something deeply embedded in monetary distrust, this lingering idea governments will just print too much money one day regardless of any current proof or evidence for the suspicion.

Even though inflation was far from anyone's list of problems during the dot-com (OK, consumer price inflation was far from anyone's mind, but even Alan Greenspan's irrational exuberance speech told you the issue wasn't money printing but money itself), a 10-year TIPS instrument made its debut on January 29, 1997, anyway.

These securities give the holder inflation protection in two forms, each decided by the published CPI rate. Every year, the owner is credited with additional principal to make up for the amount general consumer prices have increased; if the CPI rises 5% during a yearly period, if you started it with $1,000 face value the government gives you an extra 5%, or $50, principal.

And then it pays you interest the following year on that updated principal value. You get both principal and coupon protection from inflationary currency in a way not too dissimilar to the Massachusetts trial.

There are any number of arguments relating to how accurately the CPI measures consumer price inflation, and there is definitely a mystique of pseudo-precision surrounding the government's (BLS) consumer price bucket concoction, and whether there is such a direct relationship between modern money printing and how much or if might find its into this kind of data.

Yet, the index's lengthy history correlates closely enough with bouts of genuine inflation that we can reasonably and predictably expect someaffiliation between perceptions about future inflation and the prices of these TIPS instruments. There's enough of a profit motive in how these things pay out to make this a rational assertion.

Should the market get a sense of any money printing excesses, why wouldn't we see it in the TIPS market?

You've probably already guessed where I'm going with this. Earlier this week, the BLS said the US CPI had increased a touch more than 7% in December 2021 from its level estimated for December 2020. The highest "inflation" rate in almost forty years; dating back just after that whole Great Inflation business of the seventies.

And, relatively speaking, TIPS are in pretty high demand. The way they've been priced - though not just recently - is so that each's posted "real" yield is decidedly less than zero. Negative real yields because the market expects only some small positive level of CPI increases over the years each TIPS instrument (there are denominations of 5-years, 10-years, and 30-years) might be in any investor's possession.

It is incongruous to last year's elevating CPI rates.

The most straightforward interpretation, the only rational one, is that the market for inflation protection isn't actually all the robust for protection against real inflation. There's some expectation for some positive CPI increases, though nowhere near these recent levels.

Whatever they've been in 2021, the TIPS market doesn't believe they're going to stick around for long enough that these "real" yields would fall any further (as higher demand for TIPS given the perception for sustained CPI rates we are not currently seeing).

On the contrary, very recently, especially since the start of this year.

Tweet   @brothersjudd