TIPS are Treasury Inflation Protected Securities. The name implies that purchasing these bonds provides a way to protect your money from inflation. Per the Treasury website: “As the name implies, TIPS are set up to protect you against inflation…The principal (called par value or face value) of a TIPS goes up with inflation and down with deflation.” A lot of people likely stopped reading there. However, TIPS are still bonds. So when interest rates go up, the value of the bond decreases. The crux of the failure in TIPS in 2022 was a double whammy: the inflation rate peaked along with an aggressive rate hike cycle by the U.S. Federal Reserve. Thus, the rate hikes eroded the bond value faster than inflation increased the value of the bond.

Is It Time to Buy GTIP?

The weekly chart below of the Goldman Sachs Access Inflation Protected USD Bond ETF (GTIP) shows how buying in anticipation of inflation made a lot of sense. Now, inflation is proving sticky, and in due time, with the backdrop of slowing growth, the Fed will be under increasing pressure to CUT rates. This stagflationary combination should provide a golden moment for TIPS.

With growth pressures ahead, the Fed is unlikely to hike rates anytime soon. This reality is an important backstop for GTIP. As soon as the Fed started to hike rates in 2022, GTIP topped out. GTIP plunged about 18% before it bottomed in 2022 and did not hit a final bottom until after the Fed’s last rate hike in July, 2023.

Note that GTIP has been on the rise in 2025. With a current yield of 3.5%, GTIP is “close enough” to many high yield savings accounts to make GTIP competitive alternative to cash for the conservative part of a portfolio. Even with tariffs creating a “one-time price adjustment higher” in prices, GTIP should get quite a boost in the coming year. Rate cuts from the Fed will provide an extra kicker. In other words, GTIP looks like a good investment option for the potential stagflationary environment to come. This TIPS instrument could even rival the return for stocks in the coming year or more.

Here Comes RBIL

The podcast “Talk Your Book” had an an excellent discussion on TIPS and potential alternatives to TIPS. In “A Better Money Market Fund“, F/m Investments explained why TIPS failed so spectacularly: “People ignored the fact that real yields can go up too…That real rate rise cannibalized any uptick you had in your inflation accrual…It was just typical bond risk.”

F/m Investments offered up the F/m Ultrashort Treasury Inflation-Protected Security (RBIL) as a an alternative to TIPS. Here is the case the company makes for RBIL (shown in graphical detail on the podcast site):

• A multiple bond portfolio consisting of TIPS maturing in a year which strips out rate duration risk and mainly leaves the principal appreciation from the inflation protection.
• Gives a modest coupon and the CPI appreciation
• Will protect purchasing power
• It is a better money market fund
• Avoids the tax complications of TIPS
• Provides the efficiency of an ETF

RBIL is definitely an interesting alternative to buy TIPS outright. But given RBIL just launched in late February, I prefer to buy GTIP for now, especially given my own inflation and rate expectations. In another year or so, I will check on the relative performance of GTIP vs RBIL and adjust as needed from there.

Tariffs Mean Inflation

F/m provided a simpleton’s guide to tariffs and inflation that serves as a summary to their short post on soaring inflation anxieties:

• When you hear tariffs, think inflation.
• When you hear tariffs are delayed or are coming sooner, you have to think more inflation.
• When someone tells you tariffs won’t cause inflation, you have to think Japan….or deep depression.
• We know all the outcomes from tariffs in the short-term will be inflationary – either because they’ve happened, or worse, the fear of coming tariffs drives the hoarding of goods and services which in turn drive short-term prices higher.

Case closed.

Be careful out there!

Full disclosure: no positions

The post Why TIPS Failed Spectacularly In 2022… And Is NOW the Time to Buy? appeared first on Inflation Watch.

The Carry Trade

Simply put, the carry trade is the act of borrowing in a currency with low interest rates and using those funds to buy assets with higher rates or anticipated returns (like stocks). The Japanese yen became an “easy” carry trade for big investors because the Japanese yen (FXY) had near zero interest rates. Once the Fed started hiking rates, traders could earn increasing returns by borrowing in yen and buying U.S. bonds. After equity markets bottomed in October, 2023, traders could earn increasing return borrowing yen to buy stocks (at least one analyst thinks the carry trade has been in effect since the rebound from the Great Financial Crisis!). Crypto currencies are even acting like they have been caught up in this massive delveraging. At the time of writing Bitcoin (BTC/USD) is down around 24% in just 8 days and looks like it could soon reverse all its gains since the SEC approved Bitcoin spot ETFs.

The strength in the yen and the presumed unwind of the carry trade has been breathtaking over the last two weeks. The Australian dollar versus the Japanese yen (AUD/JPY) has fallen around 17% in the three weeks since its last peak. AUD/JPY now sits at levels last seen in early June, 2023. AUD/JPY has long been my favorite currency market indicator of sentiment in the stock market. However, the current decline happened so rapidly, that I had no time to adjust my mind to appreciating that AUD/JPY suddenly mattered again in a significant way. After all, the Bank of Japan “only” hiked its target rate from 0% to 0.25%. The hawkish tone of the BoJ on normalizing policy must have traders scrambling to get completely out of the way of future rate hikes.

So what now?

Financial markets are essentially in panic mode. It is near impossible for the stampeding herds to see the other side of this major market disruption. As a contrarian of extremes in financial markets, I am compelled to lean the other way even though market breadth in the stock market still needs to fall significantly to hit oversold levels. Thus, I cannot buy as aggressively as I normally would…”nibbling” is my modus operandi for now (I am also re-accumulating cryptocurrency positions like BTC/USD).

In currency markets, I slipped on my well-crafted trading strategy on the Japanese yen. I gave up on the short GBP/JPY too early, and got overly confident in what looked like the obligatory rebound for USD/JPY side. So, in recent days, I have raced to keep up with new short GBP/JPY positions and have been simply astounded by how fast these positions hit profit targets. This clearing in turn forces me to reload at lower prices as the Japanese yen keeps racing away. Last week, I even dabbled in shares and call options in Invesco CurrencyShares® Japanese Yen Trust ETF (FXY). At SOME point, this non-stop slide in yen currency pairs will end and give way to a (potentially) abrupt and vicious countertrend relief rally. That time will offer a brief opportunity to bail on short yen positions and then step aside to catch a few breaths!

Be careful out there!

Full disclosure: long AUD/JPY, long USD/JPY, short GBP/JPY, long BTC/USD

The post The Carry Trade Sweeps the Sahm Rule Aside appeared first on Inflation Watch.

• Japan experienced a limited shift in demand. In the U.S. in particular, a sharp shift from services to goods consumption created severe supply shortages which in turn helped drive up prices.
• A strong risk aversion in Japan limited pent-up demand for private consumption. As a result, Japan did not experience disruptive shifts in demand. Japanese conservatism has also anchored labor mobility, a key ingredient for the kind of wage pressures that can contribute to inflation.
• The waning of the pandemic has revived the Japanese corporate “norm” of deflationary thinking – the “assumption that prices will not increase easily.” Accordingly, unlike U.S. firms, Japanese firms prefer to focus on long-term business relationships and are reluctant to increase prices. According to Masayoshi, “When there are supply-side constraints for certain goods, U.S. firms tend to raise prices relatively quickly and allocate goods by giving preference to customers who are willing to pay higher prices. In contrast, Japanese firms seem to place more emphasis on long-term business relationships with customers and respond to their demand as much as possible while keeping selling prices unchanged.”
• Service prices remain relatively weaker in Japan (although Masayoshi called on a review of statistical practices).

Masayoshi concluded with the claim that “our understanding of inflation remains limited.” Despite this purported limited understanding, the Bank of Japan is quite confident enough to buy an unlimited amount of bonds to defend its ultra-low interest rates. Last week the BoJ surprised financial markets with this vigorous defense of its zero interest rate policy (ZIRP). The immediate reaction in the currency market sent an already rapidly weakening yen even lower. The rush to sell more yen created a (likely temporary) exhaustion of sellers. The yen rebounded for three days before selling resumed on Friday.

As long as a differential in inflationary expectations exists between Japan and the U.S., the downward pressure on the yen should also persist.

Be careful out there!

Full disclosure: long FXY put options

The post An Attempt to Explain Today’s Lower Inflationary Pressures In Japan appeared first on Inflation Watch.