Weakening US Dollar Hedge

[kagame]

thanks guys

[Jeff W]

TIPS are efficiently priced... the real yield prices in the expected government manipulation of CPI.

[DcifrThs]

[ QUOTE ]
TIPS are efficiently priced... the real yield prices in the expected government manipulation of CPI.

[/ QUOTE ]

well i definitely must have missed this lesson. one of the guys i worked with was one of the "fathers" of the TIPS.

he was part of the team that advised the treasury in 1994 to price the bond the way they currently do in the face of a whole slew of differing opinions. it was basically tons of huge players vs. him and a select few other folks. the small group won the day and we have TIPS as we see them today.

i haven't heard of any probability that the govt would manipulate the CPI #. how would you go about determining that probability given the real yield (i.e. how could you tease that out?)

thanks,
Barron

[Jeff W]

I should be clearer... I don't know whether government is manipulating CPI or not(I certainly think they have a lot to gain by doing so as long as they can maintain plausible deniability), but insofar as they are expected to it should be priced into the yield.

[ QUOTE ]
i haven't heard of any probability that the govt would manipulate the CPI #. how would you go about determining that probability given the real yield (i.e. how could you tease that out?)

[/ QUOTE ]

Good topic for a research paper. It might be insoluble, tho.

[kimchi]

[ QUOTE ]
TIPS are efficiently priced... the real yield prices in the expected government manipulation of CPI.

[/ QUOTE ]

Then would the TIPS yield be a better measure of true inflation than CPI?

I noticed the markets bust their wad at the end of last week after good inflation figures came in. I suppose most market participants just watch the CPI as this influences Fed policy (it's ironic the Fed influences CPI which influeces Fed policy)

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
TIPS are efficiently priced... the real yield prices in the expected government manipulation of CPI.

[/ QUOTE ]

Then would the TIPS yield be a better measure of true inflation than CPI?

I noticed the markets bust their wad at the end of last week after good inflation figures came in. I suppose most market participants just watch the CPI as this influences Fed policy (it's ironic the Fed influences CPI which influeces Fed policy)

[/ QUOTE ]

Jeff and you are correct.

TIPS provide, via their pricing and the pricing of their nominal counterparts a much better view of what the market expects inflation to be over some time period.

that measurement is called "Break Even Inflation" or BEI. it is the rate of inflation at which, if it always came in at that expectation, the return yield on nominal bonds would be exactly equal to the yield of similar duration TIPS.

i.e.:

(1+Real yield)*(1+BEI)= (1+Nominal yield)

CPI is backward looking. BEI is forward looking.

Barron

[kagame]

bump

[Fishhead24]

GOLD/SILVER/FARMLAND are good bets with the weakening of the US DOLLAR.

[mtgordon]

If we're going with very general things (not specific hedges) then you could always go with Europe/Pacific/Emerging Markets.

[kagame]

I bumped this so everyone could have the benefit of the excellent TIPS discussion in this thread