Fresk: TIPX, A New TIPS Approach

November 27, 2013

Breakeven Exposure

As mentioned, a potential trade for an advisor worried about long-end exposure in a broad TIPS fund would be to use a short-duration TIPS ETF.

A trade-off for this move in duration would also be a trade-off in the inflation breakeven exposure to which an advisor would be getting exposure.

For this comparison, I’ll use the following indexes to represent breakeven exposures going back to October 2004, and I’ll use monthly data:

  • Long: US Breakeven 30 Year (Bloomberg ticker USGGBE30)
  • Intermediate: US Breakeven 10 Year (Bloomberg ticker USGGBE10)
  • Short: US Breakeven 2 Year (Bloomberg Ticker USGGBE02)

Over the time period measured, the average breakeven levels are as follows:

  • Long: 243 basis points
  • Intermediate: 220 basis points
  • Short: 150 basis points

Therefore, an advisor moving from long-to-intermediate breakeven exposure would be giving up, on average, 23 basis points of breakeven exposure. This compares with the average 93 basis point exposure an advisor would be giving up going from long-to-short breakeven exposure.

As a comparison, here is a look at the historical option-adjusted spread (OAS) of the long, intermediate and short-term investment-grade credit indexes:

  • Long: 189 basis points
  • Intermediate: 157 basis points
  • Short: 129 basis points (60 basis points give-up from long)

Historically, the breakeven curve for TIPS is steeper than the credit curve. Therefore, advisors will experience more “give-up” of exposure sliding down the TIPS curve than they would experience sliding down the credit curve.

Additionally, short-duration breakevens are historically much more volatile than intermediate- and/or long-term breakevens. Using the time period above, the standard deviation is 3 to 4 times higher for the short-term breakevens. This same relationship does not hold true for investment-grade credit, where short-term OAS standard deviation is in the 1 to 1.5 times range.

Conclusion

The recent addition of TIPX has filled the gap in ETF exposure in the intermediate part of the TIPS market.

And the takeaway is this: Intermediate TIPS look to have the benefit of shortening duration from a broader TIPS allocation without giving up a substantial amount of breakeven exposure that would result from using the current short duration offerings.


Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Georgia. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at (800) 222-7636 or www.stadionmoney.com.

References to specific securities or market indexes are not intended as specific investment advice.

 

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