Stocks Do Best When TIPs Yields are the Lowest

10-Year TIPs Yield and Stock Returns

I’ve been crunching the numbers on stock returns and the 10-year TIPs yield. According to findings (below) stocks do best when TIPs yields are the lowest - the 10-year yields, in particular.

Intuitively, this relationship makes sense. TIPs are a decent measure of expected bond values, so the lower their yields, the better the return ought to be for stocks.

One problem is that there’s not a lot of data. I went to FRED and took all 10-year TIPs data, which only goes back to 2003. I then compared it with the Wilshire 5,000 Total Return Index. I wish we had more data. In time, that will come.

I compared the TIPs yield on one day and with the equity return the following day. I divided the TIPs into eight different buckets. Here’s what I got, listed by ascending TIP yield.

So when TIPs pay nothing, or less than nothing, people turn to stocks. When TIPs start offering a real alternative, stocks are abandoned. The TIPs tipping point seems to be at 2.43%. Above that, stocks turn negative.

These numbers are pretty impressive. As I said before, I’d like to see a lot more data but we just don’t have it yet. I’m also concerned that the disruptions caused by the financial crisis mucked up some the relationship. Still, over the long term, this should hold up. As always, the data will say.

When the 10-year TIPs is 1.63% or higher, the stock market is basically flat (about 0.57% per year, which is less than TIPs could have gotten you).

by Eddy Elfenbein, August 14th, 2015 at 12:52 pm

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