Bond Market Believes Inflation Headed Our Way

A stronger sign of inflation headed our way…

Late last week, the U.S. Treasury sold $15.0 billion in 10-year Treasury Inflation Protected Securities (more commonly known as “TIPS”) at a negative yield (interest rate), for the first time in its history. Demand for this issue was strong from bond investors.

TIPS are instruments that are purchased by bond investors from the U.S. Treasury as a hedge against inflation.

TIPS are tied to the Consumer Price Index (CPI). This means that, should inflation rise, TIPS would pay the bond investor the interest plus the change in inflation that occurred over the previous year. Should there be deflation, however, the bond investor would lose money on his/her investment.


For the first time, bond investors paid a negative yield, which means bond investors paid extra to purchase these TIPS from the U.S. Treasury.

This, dear reader, tells me two things. On the surface, if we look at this (bond investors buying Treasuries with negative returns), we think investors are finding fewer and fewer places to park their money safely—they are sacrificing profit for the actual return of their money. But there is more to it.

With the eurozone crisis unresolved and global growth slowing significantly around the world, which I’ve been writing a lot about lately, investors are looking for safety. Right now, the safest of currencies to be in is the U.S. dollar…and maybe only because it is the reserve currency of the world.

When bond investors buy TIPS with a negative return, it really tells me that bond investors are worried about inflation. Why pay more for something unless you are fairly confident it will appreciate in value in the future?

As I’ve been writing since the credit crisis started, the Fed is trying desperately to generate inflation. Bond investors are telling the market that they think the Fed will be successful. Combine this with the Fed governors indirectly continually talking about QE3 and the argument for buying TIPS from the U.S. Treasury becomes that more attractive to bond investors.

In my opinion, if you are going to buy an inflation hedge, gold-related investments are really the best plays. TIPS are fine, but not at a negative yield and not when they pay out in dollars. Should the Fed continue to expand the money supply aggressively (i.e. printing money), then the value of those U.S. dollars will continue to fall, which means a bond investor would be paid back in the future with dollars that are worth less than today—evaporating any return earned by the bond investor from higher inflation.

Gold offers protection from currency depreciation, since historically, it rises when currencies depreciate. History has repeated itself over the last 10 years. As the dollar depreciated in value, gold embarked on its bull run.

This is why gold has been a store of value for thousands of years. It can’t be printed, its supply is limited, and it is very difficult to mine.

Inflation is coming. The recent action in the TIPS market is just another sign of that. But if you want to protect yourself against inflation, the best vehicle, in my opinion, is still gold-related investments.

Where the Market Stands; Where it’s Headed:

You have to hand it to this market. Quietly, without much fanfare, January is turning out to be a banner month for the Dow Jones Industrial Average. With seven more trading days in the month still to go, the market is up four percent for 2012 already.

I’ve been writing for months that the bear market rally that started in March of 2009 is alive and well. We’ve been seeing the proof since the beginning of October. But each time the market moves higher, more investors and stock advisors enter the bullish camp. Nothing alarming yet, but once enough people are in the bullish camp, that’s when we will see the bear market rally finally run for the exit gate.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S.peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.