TIPS broken

TIPS fell 7.85 percent since June as investors shunned all but the most easily traded debt amid the seizure in credit markets. TIPS were the only part of the U.S. government bond market to lose money in that time as Treasuries of all maturities gained 2.11 percent. TIPS make up about $520 billion of the $4.8 trillion in U.S. marketable debt outstanding.

Fed officials watch the TIPS market for signs of inflation expectations. The slump of TIPS reflects the dire economy. The inflation rate will fall below 1 percent by the second half of next year as the economy lapses into a recession.

But some institutions including BlackRock Inc., Brown Brothers Harriman & Co., DWS Investment GmbH and New Century Advisors are buying the securities because they bet that inflation will likely increase at a faster pace over the next decade than the 1 percent annual rate TIPS yields suggest. According to the median estimate of 69 forecasters surveyed by Bloomberg, consumer prices, unchanged in September, may increase 4.5 percent this year and 2.65 percent in 2009.

Maybe it’s not a good time to bottom fishing the U.S. equity but a good time to bottom fishing TIPS?