My TIPS, Treasuries, and Inflation Model — III

TIPS Treasuries and Inflation Model 3

Personally, I don’t think it is a big deal that the Fed raised the discount rate.  The discount rate plays a small role in monetary policy.  I do think that the record steep yield curve is the bigger story.

The forward Treasury yield curves at present are telling a story.  Here are the main ideas of the story:

  • Short interest rates will rise dramatically for the next 15 years then decline dramatically.
  • Same for inflation rates, but make that 17 years.
  • Real short-term rates peak 12 years out, but the same story.

For proof, look at these graphs that summarize the results of my model:

If you think short term inflation rates will be lower in the short run, then short short TIPS and go long nominal short bonds.

If you think that long inflation rates will be higher than the models indicates, then short long nominal bonds, and go long TIPS of similar maturity.

But after all of this I would simply say that the upcoming offer of the 30-year TIPS looks fairly priced in the “when issued” market.  I look forward to the issue of the 30-year TIPS, and I know it will improve my model.