Thought Leadership

When Markets Disagree: TIPS, Commodities, and Inflation

August 7, 2008

If markets are efficient, can well developed and liquid markets reach opposite conclusions about the future direction and level of inflation?  If markets discount the same information about the future of inflation, yet reach different conclusions, what is the possible cause of this apparent inefficiency and how long can it last?

In the discussion that follows we will offer a thesis that seeks to reconcile the apparent contradiction in Treasury and commodity market viewpoints on inflation.  In essence, we will offer that the supply and demand characteristics of the TIPS and nominal Treasury markets are at the root of the compressed TIPS breakevens and low Treasury market inflation signals.  Additionally, we will highlight the opportunities that exist today for investors looking for ways to take advantage of the under priced inflation protection available in the TIPS market.