(Bloomberg) -- The wheels are off in the $1.5 trillion market for Treasury Inflation-Protected Securities.
These notes, which carry interest payments that are indexed to the U.S. consumer price index, normally outperform regular Treasuries when energy goes on a tear and vice versa. Yet after massively underperforming in tandem with oil’s worst slump since 1991, TIPS ignored crude’s bounce on Tuesday to slip further, and even stronger-than-forecast inflation data on Wednesday couldn’t stem the tide.
“Energy bounces and TIPS don’t?” said Com Crocker, an investment strategist at New Century Advisers and former TIPS market maker from 2002 to 2017. Dealers hedging with energy futures “lost money on both sides of that trade in a significant way,” he said, adding that liquidity is “as bad as I’ve seen, and I’m including 2008.”
A gauge of U.S. consumer prices rose in February at the fastest pace in five months, a release on Wednesday showed. Though a closely watched indicator of inflation, such reports are being discounted by investors focused on the potential fallout of the coronavirus pandemic.
The market “tried to rally a bit” on the data, which showed that inflation continued to run at underlying levels above 2%, said Michael Pond, head of inflation strategy at Barclays (LON:BARC) Plc. “But the market is already dysfunctional, and so breakevens declined yet again.”
An inflation-protected product that doesn’t benefit from inflationary signals is treacherous, Pond said.
“Unless you feel confident that you can hold a position to maturity regardless of what the market does, you have to tread very cautiously.”