Treasury expected to boost sale of TIPS

Marketplace Staff Aug 5, 2009
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Treasury expected to boost sale of TIPS

Marketplace Staff Aug 5, 2009
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STEVE CHIOTAKIS: When your economy depends on borrowed money, and lenders are worried inflation will devalue the dollars they’re lending before it’s time for them to be paid back, how do you convince them to lend? You give them TIPS! And that’s the announcement we’re expecting from the Treasury Department today. Marketplace’s Jeremy Hobson joins us LIVE from our bureau in New York to explain. Good morning Jeremy.

Jeremy Hobson: Morning Steve.

CHIOTAKIS:So what’s the Treasury Department up to here?

Hobson:Well according to The Wall Street Journal, the Treasury Department is going to announce today that it is boosting the sale of these TIPS, that’s Treasury Inflation-Protected Securities. And these are bonds in which the principal increases or decreases based on the Consumer Price Index. So you don’t have to worry about inflation if you’re lending the U.S. government money.

CHIOTAKIS:So why does the government want to ramp up these TIPS?

Hobson:Well because there were a couple of relatively weak Treasury auctions last week. And also a very successful TIPS auction. And of course China, which is the biggest lender to the United States, has been making noises about inflation for some time and the Chinese have reportedly told Treasury they are interested in buying more of these inflation-protected securities.

CHIOTAKIS:Now I can see, Jeremy, how these TIPS can be good for the party buying them, but they seem kind of like a bad deal for taxpayers?

Hobson:Well they can be. But I just spoke with Guy LeBas who’s a fixed income strategist with Janney Montgomery Scott, and he says right now because inflation is low an ordinary bond is actually a better deal for the investor than an inflation-protected bond.

Guy LeBas: For instance the 10-year TIPS is currently yielding 1.82 percent without inflation whereas the 10-year Treasury is yielding about 3.72 percent.

Hobson:But of course, Steve, if those who say inflation will rise as the economy rebounds — because of all the money the U.S. government has been borrowing — if those people are right, then obviously TIPS would be a good deal for the investor, bad for the taxpayer.

CHIOTAKIS:All right, Marketplace’s Jeremy Hobson joining us from our bureau in New York. Jeremy, thanks.

Hobson:Thank you.

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