Tuesday, July 25, 2006

TIPS auction goes well

The TIPS market is flying after the Treasury's 20-year TIPS auction went quite well. The 2032 TIP is up about 1/2 point, while the 30-year is down 1/4.

Previously in this space, I have written about the implied inflation curve based on Treasury yields versus TIPS. Here is the updated graph.
This curve continues to flatten. The slope from 2 to 10-years started the year at +19, was only +5 on 6/30, and is now -1. Similar pattern as 2-30, which went from +48 to +28 to +24. I think this is a pretty good indicator of how tight monetary policy is. Now that this curve is inverted between 2-10, it tells me that investors no longer expect accelerating inflation. The Fed isn't behind the curve. A pause is imminent.


Anonymous said...

I like your blog, its very informative. Since you said you wanted more comments, here's mine.

You and your posters seem intimidatingly smart, so you might be scaring people off.

So I'll ask what may be a "dumbing down" question, to help encourage other timid posters.

I bought OSM (Sallie Mae Inflation Protected Notes) about six months ago thinking them to be a safe place with the Fed raising rates due to Inflation expectations.

There down of course, but what really bugs me is that they are down more than and TLT (the US Treas 20 yr ETF). They are also down more than TIP, but that is probably due to the cash dividend versus the way Tips accrue them.

Did I make an incredibly stupid buy, or has this been an unusual market event?


Tom G. said...


I'm not familiar with the OSM product. Is it a bond? If so, what's the maturity? If not, can you give me a ticket symbol or some such?

Anonymous said...

The trading symbol is OSM, the notes expire in 2017, redemption at $25. So I guess its a bond, although they are called notes. It trades on the NYSE just like a Closed End Fund>

Here is a quote from a Forbes article dated 12/12/05, which explains them better.

Forbes Quote: "A name you hardly ever hear these days in the financial services area is SLM Corp.--the old Sallie Mae, or Student Loan Marketing Association. Branching beyond student loans to business lending, SLM has an interesting Consumer Price Index-linked note, maturing March 2017. It is rated A2 by Moody's and A by S&P. Resembling a preferred (though technically it isn't), the note has good liquidity. With 8 million shares outstanding, it trades on the New York Stock Exchange."

"This SLM (OSM) note is composed of a fixed coupon of 2%, plus an inflation adjustment paid monthly."

"The formula now--(as of 12/12/05 - my parens)--yields an annual 5.65%. That beats what you get these days on the Treasury Inflation-Protected Securities. A ten-year Tips will get you 4.34% right now. Besides paying you less, the Tips coughs up its inflation adjustment only at maturity."

OSM was coasting along at $24.50 until April, then they dropped to the $22.50 range and remain there.

What baffles me is that the 10yr US Treasury ETF is down less than 5%, and OSM is down over 10% in the same period.

With all the fear over rampant inflation, I am at a loss to explain it.



Tom G. said...

Alright, I found your security on Bloomberg. The structure looks solid to me, so it doesn't look like there is some hidden problem with this thing.

I can tell you that SLM Corp bonds have widened a bit in May and June, but I'd say that can only explain a 1% move. My bet is that the thing just has no sponsorship. By that I mean there aren't enough people trading it to make an efficient market, so its price deviates from its intrinsic value. I trade a lot of closed-end funds personally, and the same thing happens in that market.

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