Reply #16: Wonder if this guy will be changing his tune? [View All]

[54anickel]

He offers a worrisome picture and then totally negates it at the end of the article. :shrug:

http://money.cnn.com/2003/11/20/commentary/bidask/bidask/

snip>
A relatively new asset class, buying TIPS makes sense if you are worried over the prospect of a rise in inflation; if you expect falling inflation or, worse still, deflation, TIPS are not a good bet. The Fed is worried about the latter scenario but some big investors are more worried about the former. Bill Gross, the bond manager who overseas PIMCO's more-than $250 billion portfolio, has said he is an active buyer of TIPS.

At the same time, however, the yield on the 10-year Treasury, at 4.2 percent, is actually quite low. That suggests a forecast of a less than robust economic environment in the years to come -- one where the Federal Reserve will not see fit to raise rates by all that much.

Put the rising TIPS spread and low Treasury yields together and what do you get? That's right: a forecast of stagflation.snip>
More troubling, some investors worry that China may scuttle some of its vast U.S. Treasury holdings in retaliation, a move that could hurt Treasury prices and the dollar badly. A falling dollar, because it lowers U.S. purchasing power, is inflationary.

snip>
Before the recent recession, you have to go all the way back to 1983 to find a period when capacity use was so low. If the United States was a closed economy, one would view this as an environment that would create little growth and little inflation. But since the U.S. economy is open to the world, and open to inflationary pressures from abroad, maybe what we get is stagflation.

All very frightening, right?

Let's take a step back. Much of the reason there's been so much interest in TIPS lately may have nothing to do with worries about inflation. Rather, as an emerging asset class, big investors are just figuring out how to play the securities into their asset mix. A big pension fund goes from not using TIPS to, say, a 3 percent position and things move. What superficially looks like a stagflation forecast may, in fact, be something very different.