Tuesday, October 26, 2010

TIPS Under Zero

The Treas'ry's inflation-linked note
Is yielding a negative quote;
If deflation holds sway,
It's investors who pay,
Though the likelihood may be remote.

For the first time ever, the Treasury Inflation-Protected Securities (TIPS) were issued at a negative yield: -0.55%. Since the actual interest payments will include an inflation premium (currently expected to be 1.7% per annum over the five-year life of the notes), investors will likely receive a net interest rate of something like the current 5-year T-note yield of 1.18%. However, if inflation slows, investors earn less, and may even end up paying interest to the Treasury.

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