Watching TIPS can be a forecaster for mortgage rates

The WSJ ran THIS ARTICLE over the weekend which highlights the recent performance of TIPS versus standard US Treasury debt securities.  “TIPS” is an acronym which stands for Treasury Inflation Protected Security.  The difference between owning TIPS’s and a normal US Treasury note is that with the TIPS’s the US government will compensate the holder for actual inflation thereby paying a guaranteed real rate of return while with the standard US Treasury note the note-holder bears all inflation risk.

So how are TIPS significant in terms of gauging mortgage rates?  We know that inflation is the primary driver of mortgage rates.  When expectations for future inflation rises then long-term interest rates rise as well, including rates on mortgages.

What THIS ARTICLE points out is that over the past couple weeks TIPS’s have outperformed standard US Treasuries after under-performing for the first 9 months of the year.  This is may be an indicator that the markets view of inflation/ deflation is shifting back towards an inflationary bias AND that mortgage rates will soon begin to rise in reaction.  Of course, the market’s outlook can change with new information and we expect the Fed’s post monetary policy statement on November 3rd to be a significant new piece of information.