The Economy

Buying a Negative Yield

March 30, 2012

As investors' worries about inflation grow, they are increasingly willing to pay a premium to protect themselves against future rises in consumer prices. According to Bloomberg, the U.S. sold $13 billion in 10-year Treasury Inflation Protected Securities at a record low negative yield of -0.089%. The market is factoring in inflation over the next 10 years even if the Federal Reserve Board and others are not planning on inflationary pressures any time soon.

Investors have been questioning themselves about the wisdom of buying a 10-year Treasury that is paying 2.25% with the Consumer Price Index (CPI) cruising at 3.3% and likely to go higher. That disparity between the rate and the CPI guarantees a loss of purchasing power. As a result, some investors have turned to Treasury Inflation Protected Security (TIPS).

The principal on TIPS increases with inflation and decreases with deflation, as measured by the CPI. The greater of the original or adjusted principal is paid at maturity. TIPS pay interest twice a year at a fixed rate. The rate is applied to the adjusted principal so the amount of interest received is also tied to inflation. The stated interest rate associated with the record-low negative yield is 0.125%, so you do not buy TIPS to make a lot of money, but to preserve principal.

Our outlook for oil calls for more inflationary pressure over the next year. Energy, food, medical, and transportation are all contributing to the rise in the CPI. Businesses must respond to these inflationary pressures even if the Federal Reserve Board does not. Here is ITR's advice: Lock in costs; plan to raise prices; expect interest rates to remain low for too long; select price indices that favor your negotiations with your clients; and find indices that will minimize your exposure to your vendors.

About the Author

Alan Beaulieu Blog | President

One of the country’s most informed economists, Alan Beaulieu is a principal of the ITR Economics where he serves as President. ITR predicts future economic trends with 94.7% accuracy rate and 60 years of correct calls. In his keynotes, Alan delivers clear, comprehensive action plans and tools for capitalizing on business cycle fluctuations and outperforming your competition--whether the economy is moving up, down, or in a recession.

Since 1990, he has been consulting with companies throughout the US, Europe, and Asia on how to forecast, plan, and increase their profits based on business cycle trend analysis. Alan is also the Senior Economic Advisor to NAW, Contributing Editor for INDUSTRYWEEK, and the Chief Economist for HARDI.

Alan is co-author, along with his brother Brian, of the book MAKE YOUR MOVE, and has written numerous articles on economic analysis. He makes up to 150 appearances each year, and his keynotes and seminars have helped thousands of business owners and executives capitalize on emerging trends.

Prior to joining ITR Economics, Alan was a principal in a steel fabrication company and also in a software development company.