Sunday, March 12, 2017

Real Interest rates on the rise

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.