Core CPI was higher than expected at +0.3% for July and 2.2% year over year.  Inflation expectations have taken a nose dive according to the breakeven inflation rate on TIPS (“breakeven” is the difference in yield between an inflation protected treasury bonds (TIPS) and an equivalent maturity traditional treasury yield since TIPS also appreciate at the rate of inflation).  As recent as April, the 10 year maturity breakeven rate was nearly two percent and has dropped to 1.62%.  Considering the year over year core rate at 2.2% and the inflationary influence of tariffs, TIPS look cheap right now.

The global economy is slowing, making the domestic economy the best game in town.  So we expect inflation to be stronger than the current expectations that appear to be caused by overly pessimistic expectations for the U.S. economy.  But if we are wrong and things do get much worse in a hurry, at least TIPS will benefit from any flight to quality by virtue of being a U.S. treasury.  While TIPS will underperform traditional treasuries during a full blown recession they will still beat most other bonds.  TIPS certainly seem worth the risk of “only” a second place finish…


The commentary above is strictly for educational purposes. This is not meant as a guarantee of any future result or experience. This information should not be relied upon as research, investment advice or a recommendation regarding any security in particular.

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Bryce Doty is a Senior Vice President with Sit Fixed Income and Senior Portfolio Manager of the taxable bond portfolios for the firm’s custom separately-managed accounts, private investment funds, and mutual funds. Bryce oversees the firm’s team of taxable bond managers, analysts, and traders.