In the latest FOMC meeting, the Federal Reserve commented again that they felt inflation is contained and the recent rise in energy prices was only temporary. With that backdrop, it is expected that committee members will maintain their accommodative monetary policy until stronger economic data emerges. The market, however, may not necessarily believe that inflation will remain benign given the excess amount of liquidity in the financial system. One clue into investor mentality is looking at the trading levels of TIPS.
The U.S. Treasury has been issuing TIPS, or Treasury Inflation Protected Securities, at record negative yields in recent months as investors are willing to purchase these securities at a substantial premium. Recent five-year and 10-year TIPS are trading at a negative yield of 1.15 percent and 0.31 percent respectively.
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