Impact of rates & inflation on TIPS yields

[andrevc]

All,

The book says that higher inflation leads to lower yields on TIPS as more investors seek to buy them.

However, they also say that the yields on TIPS rise as the economy expands. This is primarily due to their yield tracking ST rates, which also move with the economy.

Aren’t these 2 statements contradicting each other? I mean, if inflation is accelerating (economy accelerating), ST rates will go up to keep inflation under control, meaning higher yields on TIPS. However, yields would be lower according to the first statement as inflation is heated. What’s the final outcome?

[S2000magician]

@andrevc

All,

The book says that higher inflation leads to lower yields on TIPS as more investors seek to buy them.

However, they also say that the yields on TIPS rise as the economy expands. This is primarily due to their yield tracking ST rates, which also move with the economy.

Aren’t these 2 statements contradicting each other?

No.

Many forces affect interest rates, not all in the same direction.

@andrevc

I mean, if inflation is accelerating (economy accelerating), ST rates will go up to keep inflation under control, meaning higher yields on TIPS. However, yields would be lower according to the first statement as inflation is heated. What’s the final outcome?

Sometimes the bears win, and sometimes the bulls win.

The hogs, however, always get slaughtered.

[andrevc]

Makes sense, thanks!