TIPS – For Today

Global MeltdownImage by Barrybar via FlickrYet Another Market To Watch

In my RSS feeds this afternoon I came across a great piece over at There are 3 parts to the article, each worthy of a posting in itself.

You should make Karl Denninger a regular habit.

Anyway, in the last section of the article, I came across this quote, which really perked my interest(emphasis NOT mine):

The Treasury TIPS auction today was a disaster. The market is sending Treasury and Congress a very strong warning that you both better cut this crap out or the Treasury market may dislocate, ending the party for America entirely.

If you want to know where that nasty selloff came from in the market late this afternoon, you just found the reason.

We now sit right on the precipice of a critical break of technical levels in the market – if they fracture (and they must be expected to do so, possibly as early as the overnight hours and/or tomorrow morning) the expected move is 2,000 – 3,000 points on the DOW – straight down.

Well, after that I certainly wanted to know what TIPS was! So off to Google I went, where I found the latest addition to my reading schedule, a guy named John Jansen who publishes Across The Curve (HIGHLY recommended. As you’ll see, he explains things). Here is part of what he had to say about today’s bond markets(emphasis mine):

The interesting outcome in the Treasury market today was the result of the auction of $6 billion 4 year 6 month TIPS. For the uninitiated that stands for Treasury Inflation Protected Securities. The auction was rather sloppy as the auction tail was 14 basis points. (In bond market jargon the tail is the distance from the level at which bonds were trading on a when issued basis immediately prior to the auction, to where the Treasury was able to complete the sale. That long tail represents a lack of interest from clients and dealers who would normally underwrite the security.)

The average yield was 3.27 percent which means that the new bond yields more than the nominal 5 year note. The so called breakeven spread is the spread at which inflation would need to average for the holder of the TIPS to breakeven with the nominal bond and it generally predicts a positive rate of inflation.

In this case, the TIPS is yielding above the nominal bond by about 70 basis points in which case the market is saying that it thinks that inflation will average negative 0.7 percent per year for the next 4 ½ years.

There are some forecasters who have extrapolated from the drop in oil prices that cumulative inflation for the last 3 months of this year could be as much as -3.0 percent.

For those of us too afraid to make the leap:

Saying NEGATIVE inflation is the same thing as saying DEFLATION.

Look for the rest of the week to just get worse.
(UPDATE Tues5:30am: Except, evidently, for the little bump we might get on Tuesday…
Asian and European stocks are doing generally well.
Let’s hope the same for the US.)

I am Jon, and that is TIPS for the day.