Episode summary
How to Make Inflation Work for Your Portfolio | WSJ’s Take On the Week
The Journal
· · 35 min · Hosts: Miriam Gottfried, Telis Demos · Guests: Jill Cetina
Summary
The conversation centers on whether inflation is truly under control and what that means for bond investors. Jill Cetina says the July CPI reading of 3.4% is an improvement, but inflation has still been above the Fed’s 2% target for more than five years, while financial conditions remain unusually easy and the real fed funds rate is still below the committee’s estimate of R-star. She argues that this backdrop leaves room for renewed inflation pressure from commodities, geopolitics, and other supply-side shocks.
A major focus is TIPS, or Treasury Inflation-Protected Securities, which Cetina says can help investors preserve real purchasing power because their principal is indexed to CPI. She notes that recent moves in long-dated TIPS real yields may reflect not just growth expectations or term premia, but also a market concern that CPI methodology could be revised. Citing the 1995 Boskin Commission episode, she says a downward revision to CPI would hurt long-duration TIPS more than shorter maturities.
Cetina favors shorter-duration TIPS ladders, roughly the one- to six-year sector, where real yields are still attractive and duration risk is lower. She also makes a case for I bonds as a tax-deferred emergency reserve vehicle, and warns that heavy Treasury bill issuance could amount to a kind of “Treasury form of quantitative easing” by keeping financial conditions loose and pressuring the Fed to stay easier for longer.
Key takeaways
- Jill Cetina says July’s 3.4% CPI was better than June’s 3.5%, but inflation is still above the Fed’s 2% target after more than five years.
- Cetina argues financial conditions are the easiest they have been in 10 years, with the real fed funds rate still below the committee’s estimate of R-star.
- She says long-dated TIPS may be vulnerable if the market starts pricing a risk of lower CPI due to methodology changes.
- Cetina prefers a 1- to 6-year TIPS ladder because it offers real yields in excess of 3% with less duration risk than 30-year TIPS.
- She says I bonds can be a useful tax-deferred place to hold an emergency liquidity buffer, unlike cash or money-market funds that may not beat inflation after taxes.
- Cetina warns that heavy bill issuance, now over 20% of the debt stock, can keep financial conditions loose and put pressure on the Fed.
Notable quotes
“we've been above target for more than five years tell us and I think the Fed's 2% target yes yes so we've we've been above that”
“financial conditions in the United States they're actually the easiest that they've been in the last 10 years”
“it is important to uh make sure that inflation expectations remain anchored and confidence in the back end of the Treasury curve, as well as the dollar, remain in place”
“the data task force could you know, take another look at CPI methodology”
“there are also very nice real yields to be gotten um, you know, sort of in the what I would call one to six-year sector of the TIPS market”
How the episode opens
I've been an investor in tips for a long time because the fundamental reason that we save of course is to allow us to consume more in the future. — Right. — And if we're not getting real purchasing power by deferring our consumption, then that makes it I would say a little less attractive.
Hi Miriam. — Hi Tellus. — So this week we've got a big conversation about inflation. It's obviously on the mind of the Federal Reserve, to put it mildly. Uh but it's also something that investors really need to think about and reckon with, especially people who are, and I think a lot of you out in listener land fall into this category, are fixed income investors. You buy bonds. Uh bonds are very sensitive to inflation in one way or another.
And so we've got a conversation that looks at what's actually happening in the inflation data, how we think maybe the Federal Reserve is thinking about it, approaching it. Obviously it's a tenuous time in the new tenure of Kevin Warsh, the current chair of the Fed. But then also what that means for specifically parts of the bond market that are meant to address inflation.
For example, the tips market. We'll tell you if you don't know what that means, we'll we'll introduce that acronym to you
In a little bit. — In-depth info on that. — And we're having this conversation with a really interesting guest. We are here with Jill Cetina. Hi Jill, welcome. — Thank you. Thank you, Tellus. I appreciate the invite. — Uh Jill is a professor of finance and associate director of the commercial banking program at Texas A&M University. And Jill, uh you were also at both Treasury and the Fed.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- tips inflation protection
- cpi methodology
- real returns
- bond ladders
- treasury bill issuance
Watch the episode
Watch “How to Make Inflation Work for Your Portfolio | WSJ’s Take On the Week” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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