The gap in yield between the 10-year TIP (Treasury inflation-protected security) and the regular 10-year Treasury surpassed two percentage points, as investors begin to price in expectations of inflation (see WSJ article). This comes on the day that Federal Reserve Chairman Bernanke warns of how longer-term deficits are threatening the financial stability of the U.S., as yields on longer-term Treasuries and fixed-rate mortgages rise (see Bloomberg article).

U.S. 10-Year Treasury
Source: BigCharts.com

iShares Barclays TIPS Bond Fund
Source: BigCharts.com

In an effort to take advantage of increased investor interest in Treasuries, Pimco (Pacific Investment Management Company) is launching its first ETF, the Pimco 1-3 Year U.S. Treasury Index Fund (ticker TUZ, see MarketWatch article). The current Pimco ETF was developed for investors with a focus on maintaining stable principle with little or no credit risk. The new ETF is one of approximately 65 fixed-income exchange traded funds listed in the U.S., a small number compared to the much larger equity ETF universe. In addition to the new ETF, Pimco filed prospectuses with the SEC for six additional ETFs. Three of the new ETF will cover the 3-7 year, 7-15 year, and 15+ year Treasuries. The remaining three will be tied to the U.S. TIPS, including a general TIPS Index Fund, a short maturity U.S. TIPS Index Fund, and a long maturity TIPS Index Fund. The Pimco TIPS funds are expected to compete with the iShares Barclays TIPS Bond Fund (ticker TIP, see chart above). Such products will give investors betting on hyperinflation, such as Nassim Taleb (see previous post), a new vehicle for placing their bets.

1 comments

  1. market folly // June 3, 2009 at 2:18 PM

    just posted this up on seekingalpha comments but wanted to make sure you saw it: we've noticed this inflationary bent as well and literally just today posted up about how hedge fund legend Julian Robertson (Tiger Management) sees massive inflation in our future and has shorted longdated treasuries by way of 'steepener swaps.' Explained in full here: http://www.marketfolly.com/2009/06/julian-robertsons-steepener-swap-play.html