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Allison Schrager: FED Buys More TIPS Than Treasury Issues

When many economists advocated for the creation of inflation protected Treasury bonds (TIPS), it was for two reasons. It offered inflation protection and because it was traded there would be a market price for inflation protection. This would offer policy makers and investors an indication of expected inflation, the difference between nominal and real bonds (the breakeven rate), and how much the market is worried about inflation. Both indicators are useful for setting monetary policy.

The breakeven rate is up, but not as much as you might think after a year where inflation was more than 6%. Some commentors point to the bond market as evidence that we needn't worry about inflation. But economists never expected that the biggest buyer of TIPS would be the Fed. According to calculations by Jim Bianco at Bianco Research, the Fed now owns 25% of the TIPs market and bought more TIPs in the last 2 years than the Treasury issued. The bond market has never been a reliable indicator of future inflation, but it is even less meaningful today.

Source: Jim Bianco, Bianco Research

Allison Schrager is a senior fellow at the Manhattan Institute. Follow her on Twitter here.

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Posted: January 12, 2022 Wednesday 07:00 AM