The record high stock market, trend of rising inflation and encouraging jobs numbers add up to future interest rate increases by the Federal Reserve.
The real yield on a 10-year TIPS has risen 29 basis points in recent weeks.At the same time, the inflation breakeven rate has declined - slightly.The driving force? A rise in nominal rates, which will nearly always pull the TIPS yield higher.
The rate hikes in 2017 would bring the Fed's Federal Funds Rate - a key short-term rate across financial markets - at least to 1.50% from the current 0.75%. A comparable increase in the 10-year nominal Treasury would bring its yield up to 3.35%. At that point a 10-year TIPS would be yielding somewhere around 1.10% to 1.20%.
Of course, it's possible that a higher short-term rate won't result in higher yields for TIPS. But in an environment of rising short-term rates, rising inflation, rising employment and higher asset prices, TIPS yields should also rise. I'd consider a yield above 1.00% on a 10-year TIPS a pretty good investment in 2017.