Investors sold off TIPS heavily after last week's Federal Open Market Committee statement, causing the greatest tightening between TIPS' and nominal Treasuries' yields in the past month and a half. The FOMC's hawkish statement could also put more downward pressure on breakeven spreads over the next few weeks, according to Charles Lee, interest-rate strategist at UBS. "The [Federal Reserve] mentioned its willingness to fight inflation going forward, which means higher TIPS yields," Lee said.
Spooked investors caused the breakevens on Jan. '07 TIPS to tighten up by 3.5 basis points late Tuesday and over Wednesday, with the rest of the TIPS curve also selling off. This is unusual as breakevens usually widen in a sell-off and Lee attributed the anomaly to investor concern the Fed will be aggressive--and successful--in combating inflation.
