The market for Treasury Inflation-Protected Securities is teaching investors a harsh lesson about interest-rate risk, ramping up the focus on this week’s auction of the debt.
Despite sticky price pressures, long-maturity TIPS are on track for their biggest monthly loss this year. Investors have driven up yields on all manner of long-dated bonds this month amid concern over the Treasury’s swelling borrowing needs and — ironically for TIPS — the risk that inflation may spike again or not decline smoothly.
The auction comes the day before a potentially pivotal speech by Federal Reserve Chair Jerome Powell. With inflation stripped out, TIPS serve as a pure read on the economy’s prospects, and investors expecting growth to slow after more than 5 percentage points of Fed tightening may look to buy. There are signs, however, that plenty of others are likely to need convincing, as TIPS-focused mutual funds are mired in a lengthy streak of outflows.
The Bloomberg US Treasury Inflation-Linked Bond Index is up about 0.1% in 2023, after a record rout of almost 12% last year. An index of TIPS maturing in 15 or more years is down about 6% this month. Some investors may also be wary of Thursday’s 30-year offering as an auction of 10-year TIPS in July is now under water. That sale, marked by strong demand at a yield of 1.495%, compares unfavorably with the current yield around 1.9%.
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