By Brett Arends
Retirees and those seeking secure income got two items of very good news this week, though you may only have heard about one.
July’s inflation came in below the forecast, and feared, level — although a debate now rages on what the “real” inflation rate is (more on that below).
Meanwhile, your ability to earn a guaranteed rate of return on risk-free investments, regardless of what happens to inflation, actually went up.
So-called TIPS bonds, Treasury bonds protected against inflation, fell slightly in price this week. And as a result the interest rates available for new buyers went up. (Bonds work like seesaws: When the price falls, the “yield” rises.)
A 5-year TIPS bond is now guaranteed to beat inflation by 0.3% a year between now and 2027, no matter what inflation turns out to be, and a 30-year TIPS bond is guaranteed to beat inflation by nearly a full percentage point per year. That’s equivalent to a 35% rise in purchasing power between now and 2052.
What’s going to happen to inflation over that time? I have no idea. Nor does anyone else. Some extremely smart and experienced financial minds — including fund managers David Einhorn at Greenlight Capital and Jonathan Ruffer in London — think inflation is going to rise, and keep rising. Einhorn recently suggested that the recent retreat in inflation , to borrow last year’s buzzword, is likely to prove “transitory.”
Could they be right? President Joe Biden boasted this week that the inflation rate was now down to 0%, on a month-to-month basis, but at the same time he pointed out, on Twitter, that the jobs market is booming and workers have the bargaining power that they haven’t had in decades — meaning their wages are likely to go up.
Rising wages wouldn’t be inflationary if they were matched by rising productivity, but unfortunately the latest data show that labor productivity has plunged this year .
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So the people saying inflation hasn’t gone away may not be crazy.
On the other hand, you have to wonder about all those millions of people who are, perhaps unwittingly, taking a big gamble the other way.
That includes anyone owning regular or nominal Treasury bonds. If you are a retiree or a low-risk investor, and you own a standard sort of lower-risk or balanced portfolio, that probably includes you.
The standard (non-inflation-protected) 5-year Treasury note yields about 3%. The 10-year yields less, around 2.9%. The 30-year is only slightly above 3%. Those yields make sense only if you believe that inflation has collapsed and will continue to collapse.
I have written here before about so-called break-evens, a technical measure in the bond market that effectively anticipates future inflation. Right now the 5-year break-even is about 2.7%, and the 10-year is about 2.5%. What this means is that anyone owning a 5-year regular Treasury bond, instead of a 5-year TIPS bond, is unwittingly making a bet that inflation over the next five years will average less than 2.7% a year. Anyone owning a 10-year regular Treasury bond, instead of the 10-year TIPS bond, is betting that inflation will average less than 2.5% between now and 2032.