want to hedge inflation?

treasury inflation-protected securities (TIPS) are one way to do it. quick thread on how they work and when they outperform

the principal of a TIPS bond is adjusted with inflation. these tables show the cash flow differences vs. regular treasuries

short-term TIPS are highly correlated to unexpected inflation

the breakeven rate is the level of inflation where TIPS and treasuries earn the same return

right now that’s 1.5% for the 5yr. TIPS are no longer the screaming buy they were in march

but if you think inflation over the next 5yr will be >1.5% then TIPS can still make sense

TIPS offer unlimited potential outperformance over Treasuries in inflationary environments

but regular treasuries only offer limited outperformance over TIPS in deflationary environments

this is because TIPS have a "deflation floor"

TIPS do have their downsides:

- the market is thin so they tend to get hit in liquidity crunches
- they’ve historically been more correlated to stocks than regular treasuries
- like all non-muni bonds, they’re tax-inefficient

series I bonds are a better version of TIPS

they have a fixed rate + inflation adjustments like TIPS. best of all, the return isn't taxable until you redeem the bond

I bonds are attractive when their fixed rate is higher than TIPS real yields. like now

TIPS tend to outperform regular Treasuries after periods of low breakeven inflation rates

they've only been around since 1997 so unfortunately we don’t have a lot of data. but in plain english, when nobody is pricing in inflation risk TIPS tend to do well

and if you want to read more I wrote a post series on TIPS


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More from @movement_cap

8 Jul 19
1/7 some thoughts on margin debt

margin debt stats are typically used in clickbait headlines

like so:
2/7 narrative: big numbers are scary and there's ~$600 billion in margin debt, so there's ton of leverage just waiting to be unwound

as with most big number stats - the data needs to be scaled. margin debt relative to the overall market is a boring chart (h/t @EconomPic)
3/7 I used to have a site with graphs like these

historically, it's been bad for stocks if margin debt has contracted over the past year

but this has less to do with margin debt and more to do with momentum
Read 7 tweets

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