The fear is that the Fed is so focused on saving Wall Street, it might kill the dollar and fuel rampant inflation in the process.

A Tip-off to Inflation Fears

Treasury Inflation Protected Securities, or TIPS, are a special type of treasury note. Unlike regular notes, TIPS protect investors against rising inflation. How? They are linked to the consumer price index (CPI). If the CPI rises, so does the value of the TIPS note.

There’s no such thing as a free lunch, and this extra protection has a cost. TIPS offer a lower yield than regular treasury notes, due to the inflation protection feature.

As a result, it’s possible to gauge inflation expectations by watching how TIPS trade. The wider the difference between the TIPS yield and the regular treasury note yield, the more investors are worried about inflation.

TIPS have been trading for over a decade. A few weeks ago, the yield on TIPS actually turned negative for the first time. This suggests that investors are truly and deeply worried — to the point of willing to pay from their own pockets for longer-term inflation protection.

The fear is that the Fed is so focused on saving Wall Street, it might kill the dollar and fuel rampant inflation in the process. Keep an eye on TIPS to see how inflation expectations unfold.

Justice Litle
Editorial Director, Taipan Publishing Group