TIPS bonds are Treasury bonds that pay investors extra if the CPI rises. They are an inflation hedge. Investors are selling them. So, their interest rate is rising.
This means that investors think that price inflation is a long shot. The decline in the CPI by .4% in April added fuel to the fire of speculation that the Federal Reserve’s policy of QE3 will not raise prices.
This is being interpreted as an indicator that investors think the FED will crease buying $1 trillion a year in government long-term IOUs. They think that any slowdown will raise long-term interest rates due to reduced demand from the FED. But Bernanke has repeatedly said that such a “tapering” is unlikely until the unemployment rate falls to 6.5%. So has the FOMC, which makes policy. Unemployment recently moved from 7.5% to 7.6%.
The CPI did not fall because of fears regarding the FED’s reduction of QE3. It fell because the FED’s policies are not causing price inflation. This is additional evidence that the FED will not taper off. It will continue to buy Treasury bonds and mortgage bonds. The FED no longer fears price inflation. This gives the FOMC a free hand to continue QE3.
The FED is in hog heaven. It can buy Treasury bonds without any fear of causing price increases. It will not get blamed for price increases.
The fall in demand for TIPS bonds is not evidence of a reversal of FOMC policy. It is evidence of its continuation.