Treasury Inflation Protected Securities (TIPS), Are They For You?

By: Michael_Pollaro

On November 4th, Bloomberg ran this piece: U.S. to Sell $81 Billion in Long-Term Debt Next Week

http://www.bloomberg.com/..

Same old same old, right?  Another big treasury auction.  Maybe it’s a bit more than that, this time.

Here’s what I found interesting.  In the opening paragraph of the article we learn this (bold italics mine):

The U.S. Treasury Department said it plans to sell a record $81 billion in its quarterly auctions of long-term debt next week and will replace the inflation- protected 20-year bond with a reintroduced 30-year security.

And later in the article this (again bold italics mine):

The Treasury said issuance of its Treasury Inflation- Protected Securities will rise “gradually” and that it is considering more frequent TIPS auctions to improve liquidity. The department announced it would sell the 30-year TIPS bond in February, with a reopening in August, in a change from its previous TIPS bond auction schedule.

The skeptic in me ponders, why would the Treasury want to expand its TIPs program?

Is it because the Treasury knows the market is getting a bit more worried about price inflation and TIPs may prove “helpful” in funding the government's trillion dollar deficits.  Well, if that’s true, that price inflation is returning, then that’s only going to exasperate the federal government’s future financing needs, isn’t it. 

Which leads me to my next question, which is, why then would the Treasury expand its TIP program?  One answer could be that the Treasury doesn’t believe price inflation is an imminent concern.  Plausible, given, in my opinion, the misplaced hope in the supposed Output Gap.  The other answer is that it doesn’t matter to the Treasury, at least to the extent one might think, because the Treasury knows that the BLS has their back.  TIPs, you see, are indexed to the CPI, which means that they can be "managed" to yield a negative rate of interest, for the benefit of the government and to the detriment of unsuspecting investors.

Managed, you say?

In my essay U.S. Third Quarter GDP Too Good to be True, I introduced to you economist John Williams, proprietor of Shadow Government Statistics, a guy who makes his living questioning government economic numbers.  The link to my essay is here:

http://www.marketoracle.co.uk/Article14726.html

Well, guess what?  Williams says the CPI is “managed” just like GDP, “massaged” over the years to show consumer price inflation in a better light.  Williams explains why here, under the section entitled Special Consumer Inflation Focus:

http://www.shadowstats.com/article/aa871

How “massaged” is the CPI?   According to Williams, by a lot:

So, is this new TIPs program good for you; or is it good Uncle Sam?  I guess I'm just too much of a skeptic, but it certainly has me wondering. 

Maybe you should be wondering too, at least the next time you want a buy a TIP.

By Michael Pollaro

Email: jmpollaro@optonline.net

I am a retired Investment Banking professional, most recently Chief Operating Officer for the bank's Cash Equity Trading Division. I am a passionate free market economist in the Austrian School tradition, a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor.

Copyright © 2009 Michael Pollaro - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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