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Thomas Kenny

Why the Yield on 10-Year TIPS Has Turned Positive

By June 11, 2013

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For the first time in nearly a year and a half, the yield on 10-year Treasury Inflation-Protected Securities, or TIPS, is in positive territory. According to U.S. Treasury data, the 10-year TIPS yield moved from -0.05% on Thursday June 6 to 0.03% on June 7, and then climbed an additional eight basis points (hundredths of a percentage point) to 0.11% on June 10.

This shift is the result of two factors: 1) rising yields on plain-vanilla U.S. Treasuries and 2) moderating expectations for inflation. This is an important development for TIPS, whose yields are equal to the yield on U.S. Treasuries minus the rate of expected inflation. For the past year and a half, Treasury yields have been so low that Treasuries were trading below the rate of inflation - a phenomenon known as negative real (or inflation-adjusted) yields. As a result, TIPS also traded at negative yields.

Since May 2, that equation has shifted. First, the yield on the 10-year note climbed from 1.63% on May 2 to 2.21% on June 10. Second, inflation expectations have come down considerably: at Monday's close, the difference between the 10-year Treasury and 10-year TIPS stood at 2.10%, versus 2.59% as recently as March. The result is that "real yields" have gone positive, and so has the yield on the 10-year TIPS. Five-year TIPS continue to pay negative absolute yields, however.

All of this has been bad news for those already invested in TIPS. Since the end of April,the iShares Barclays TIPS Bond Fund (TIP) has returned -5.7% - its worst stretch since 2008 - eliminating any element of inflation "protection" for shareholders. This highlights a risk of owning TIPS funds instead of individual TIPS: once rates begin to rise, these funds will be hit just as hard as the rest of the bond market.

Learn more about TIPS:

What are the risks of TIPS funds?

How to Use TIPS to calculate inflation expectations

Why would TIPS yields be negative?

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