NEAR TERM OPPORTUNITY LIMITED
I may have spoken too soon. Real rates are already pretty low, only 0.25% from as low as they went in March, 2004, when Fed Funds was at 1%.
Chart 1. US Treasury 10-yr TIPs (inflation protected bonds) - last at 1.61 on Nov. 29th. [click to embiggen]
src: US TreasuryDirect
PRICES OUT OF WHACK, ONE WAY OR THE OTHER
What's interesting is that the implied real rate is lower than the observed rate.
Despite the tax-advantage of muni bonds, they are trading at the same or better yields as treasuries. Without reviewing the data series, there are only a few times in history when that has been the case, I'd guess.
This suggests (a) an expected decline in inflation (CPI) to around 2.3% from the 3.5% most recent read; (b), a rise in nominal rates on bonds; or (c) some combination of the two. [update: or (d), a continued fall of real-rates on TIPs to even lower levels]
The most sensible is (a). However, if that turns out to not be true, then nominal rates are too dear, right? In fact, the CPI is not likely to fall, I don't think, that much. [Nor are real rates likely to skid so much further, without a full-blown recession.]
It's a continuation of the conundrum, in a way.
MUNICIPAL BONDS BEING OVERLOOKED?
What's a clear piece of confirm evidence that these yields are too dear is the relative price to municipal bonds, that also come with a AAA rating. Despite the tax-advantage of these bonds, they are trading at the same or better yields as treasuries. Without reviewing the data series, there are only a few times in history when that has been the case, I'd guess.
I don't know any ETFs that hold muni bonds, however... I suppose one would want to sell treasuries to buy munis.
BEST SOURCE OF U.S. FUNDING?
How good are the 5-yr TIPs as a funding source? I don't know how many of these bonds are available for borrowing (or at what price), but at 1% yield (or less, this week), it seems like the chances of a price rise would be slim...
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