Here’s a “TIP” on How to Gauge Inflation Risk


Psst. I have a hot “TIP” for you.

If you want to know whether inflation risk is rising, or the economy and stock market could be headed for trouble, keep your eye on the “TIPS” market.

The acronym stands for Treasury Inflation Protected Securities. They’re a specialized type of bond you can buy directly from Uncle Sam or your broker, as well as through mutual funds and ETFs like the $13.5 billion iShares TIPS Bond ETF (TIP).

Just like the name implies, TIPS offer built-in inflation protection. The value of your principal adjusts higher if inflation rises… guarding against the erosion of value you’d experience with traditional Treasury bonds.

The “spread,” or difference, between yields on TIPS and yields on nominal Treasuries is a great economic indicator.

The wider that spread, the more worried the bond market is about future inflation risk and stronger economic growth. The narrower the spread, the more worried bond investors are about future deflation risk and weaker economic growth.

With that in mind, take a look at this chart below. It shows the TIPS spread at the 5-year maturity.

larsengraphic10_12_15 v2

You can see that this spread has been contracting for a while, and just plunged to only 1.11 percentage points (also called 111 “basis points”). That’s the lowest level going all the way back to mid-2009, when the U.S. economy was just emerging from the Great Recession.

The message here is a troubling one for economically sensitive stocks, and potentially the stock market as a whole. The TIPS market is saying that deflation and recession are greater risks than inflation and overheated growth. Moreover, the last time this spread was so narrow, the Dow Jones Industrial Average was trading for around 10,000 – compared with a recent reading of 16,200.


In other words, the bond market is giving you a TIP:

Get more conservative and cautious with your investment strategies!

What else can the bond market tell you? How do I use indicators like the TIPS spread to guide my strategies and recommendations? Are there ways you can build and protect your wealth, using the interest rate markets as your guide?

I explore those issues and many others in my educational course, “How to Profit from Changing Interest Rates.” In this seven-part course, I will show you everything you need to know about how to profit from volatile interest rates, including learning:

  • Six easy steps to making big money in bonds
  • Three quick and easy ways to profit when the Fed raises rates
  • Ten forecasts for interest rates and how to profit from them
  • Investments that could rise 500% to 1,500% when rates rise
  • Six powerful forces that drive interest up or down
  • How to monitor and anticipate when the Fed is about to act
  • And much more…

Click here to learn more!

Until next time, happy investing and remember…keep your eye on the “TIPS”!


Mike Larson is a Senior Analyst for Weiss Research, and is also the editor of Safe Money Report and Interest Rate Speculator at Weiss. A graduate of Boston University, Mike Larson formerly worked at and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.