What Does Negative TIPS Yield Mean?
The excellent Finance/Economics columnist at the NYTIMES, Floyd Norris, notes:
“Incredibly enough, at the auction this week, investors locked in a negative real return of 0.55 percent. This is a bond that comes with a promise the investor will not keep up with inflation.
Here’s how this bond will work for the four and a half years until it matures. Every six months, the holder of a $100 bond will get one-quarter of 1 percent of whatever the principal value is at that point. That value will rise, or perhaps fall, with the Consumer Price Index. When the bond matures, in April 2015, the bondholder will get the principal value back.
And how much will the principal value be? The government will use a combination of the C.P.I. figures, before seasonal adjustments, for January and February 2015. If that figure is below 228.65, the investor will get back less than the $105.50 he or she paid for the bond this week. The C.P.I. in September was 218.44, so cumulative inflation of 4.7 percent, or a little over 1 percent a year, is needed for the investor to break even. If the 2015 C.P.I. is higher, there will be a profit.
If we have deflation, as some fear, the buyer does get a bit of a break. He or she will get back $100 even if the C.P.I. has fallen a lot.”