Makin' Money

A rush to hedge against inflation

Chris Farrell Mar 22, 2012

The federal government sold $13 billion of 10-year Treasury Inflation Protected Securities — better known as TIPS — at a record negative yield.

In other words, investor demand was so strong that the yield on the TIPS was less than 0! The negative yield isn’t unprecedented. The 5-year TIPS sold at negative yields in the past four auctions and the yield on the 10-year TIPS sold at auction under 0 percent for the first time last January, according to Bloomberg.

Are investors nuts? A yield on most safe investments of 0.0 percent to 1 percent is bad enough. But a yield less than 0 percent? Crazy, right? Not really.

TIPS are specifically designed as a hedge against a rise in the consumer price index, the main inflation benchmark. Right now, inflation is contained. Investors are essentially taking out an insurance policy against the risk that inflation turns out to be higher-than-expected or higher-than-feared over the next 10 years. The higher the inflation rate, the more valuable becomes the inflation hedge — and vice versa.

The negative yield is essentially the price of the “insurance premium” for the protection from inflation. 

Like most insurance policies, investors hope they’re wrong and inflation stays dormant over the coming decade.

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