The Stock Market and 30-Year TIPs Yields

Here’s an update to some studies I’ve done before. I like to see how well the stock market has performed at different levels of interest rates. I’ve also done It for TIPs yields, which are inflation-protected Treasury bonds.

The problem with TIPs is that the data doesn’t go back very far. What data we do have gives us a clear picture that stocks have done better when TIPs yields are lower. This makes sense so it’s good to see the numbers bear it out.

At the St. Louis Fed’s database, they have TIPs yields data for the five-, seven-, 10- and 20-year Treasuries going back over 16 years.

However, the one I wanted to test was the 30-year. That data only starts in February 2010. I ran the numbers and compared the 30-year TIPs to the stock market. I used the Wilshire 5000 Total Return index for stocks.

As it turns out, 1% is a nice dividing line. Since 2010, the 30-year TIPs yield has been 1.00% or higher, 42% of the time. It’s been 0.99% or lower, 58% of the time.

When the 30-year TIPs yield is 1.00% or more, the stock market has averaged an annual return of 3.02%. That’s probably less than how well TIPs performed. In other words, cash was king.

But when the 30-year TIPs yield was 0.99% or less, the stock market averaged an annual return of 22.01%. That’s quite a spread.

For context, the 30-year TIPs yield has been below 1% continuously for the last 16 months. It recently struck an all-time low of -0.46%. It’s now up to -0.37%.

This relationship seems quite obvious to me. I suspect this comparison will become more popular as we get more TIPs data.

Posted by on August 12th, 2020 at 9:29 pm


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