Animal Spirits Podcast: Talk Your Book - A Better Money Market Fund

Release Date: March 24, 2025
Hosts: Michael Batnick and Ben Carlson
Guests: Alex Morris (CEO at FM Investments) and Mark Spindel (Senior Advisor and TIPS Expert)

Introduction to the Challenge with Traditional TIPS

The episode kicks off with Ben Carlson addressing listener frustrations from the years 2022 and 2023. Investors had placed their trust in Treasury Inflation-Protected Securities (TIPS) as a hedge against inflation, only to find their investments underperforming due to unexpected interest rate risks.

[00:46] Ben Carlson: "Welcome to Animal Spirits with Michael and Ben. Michael, we got a lot of angry ish emails in 2022, 2023 from people who said hey listen, I was worried about inflation. I put my money in tips. What happened?"

Michael Batnick elaborates on the issue, explaining that many investors unknowingly invested in longer-duration TIPS, which exposed them to substantial interest rate risks when rates surged. This scenario diminished the intended inflation protection, leading to greater losses than anticipated.

[01:07] Michael Batnik: "Because all they see is inflation prot. And that's all you need to hear because... is it false advertising or what."

Introducing Ultra-Short TIPS: A Solution to Duration Risk

Alex Morris introduces the concept of ultra-short TIPS as a revolutionary product designed to isolate the Consumer Price Index (CPI) protection without the accompanying interest rate risks inherent in traditional TIPS.

[01:28] Alex Morris: "It's ultra short Treasuries, treasury inflation. Jeez. Ultra short tips... it's the greatest unlock, the greatest innovation in, I don't know, financial history in a long time."

This innovation allows investors to gain pure inflation protection by holding TIPS with maturities of less than a year, effectively minimizing duration risk. Mark Spindel underscores this by highlighting that traditional TIPS acted much like bonds during rate hikes, leading to significant losses despite their inflation hedge.

[03:06] Mark Spindel: "What happened is a lot of people invested in longer duration tips... and they fell way more than people expected with the inflation environment that we lived in."

Deep Dive: Why Traditional TIPS Underperformed in 2022

The conversation shifts to analyzing why TIPS failed as expected during the inflation surge of 2022. Mark Spindel points out that rising real yields and aggressive Federal Reserve tightening overshadowed the inflation protection benefits of TIPS.

[03:36] Mark Spindel: "People ignored the fact that real yields can go up too... the Fed tightening ultimately quite aggressively just cannibalized everything."

Michael Batnick provides a succinct explanation of TIPS, emphasizing their unique feature of adjusting the principal based on CPI, which theoretically preserves purchasing power.

[04:11] Michael Batnik: "It's a Treasury bond, full faith and credit of the United States government... it increases the value of the bond when it hits maturity."

Despite this mechanism, the bond component's sensitivity to interest rate fluctuations proved detrimental during periods of rapid rate hikes.

[04:56] Mark Spindel: "When yields go up, the principal declines, the value of the bond declines... it doesn't make up for the principal growth."

The Birth of a Better Money Market Fund

Ben Carlson raises a critical point about the initial low real yields post-pandemic, questioning whether the yield environment contributed to TIPS' underperformance.

[06:30] Ben Carlson: "What wasn't? Weren't the yields part of the problem too... the starting point that people were investing in?"

Mark Spindel concurs, explaining that the primary issue was the surge in real yields outpacing the inflation accrual benefits.

The hosts introduce their collaboration with Alex Morris and Mark Spindel to create a new ultra-short TIPS product designed to offer pure inflation protection without the long-term interest rate risks.

[07:47] Michael Batnik: "We buy only tips that are going to mature within a year. And that essentially strips out that interest rate duration risk that injured investors."

Understanding the Mechanics and Benefits

The new product ensures that investors receive CPI-linked principal appreciation while maintaining minimal exposure to interest rate volatility. Mark Spindel emphasizes the reliability and built-in inflation protection of the product.

[09:06] Mark Spindel: "There is a modest coupon... it's just stripping everything else out. There is a modest coupon."

Ben Carlson highlights that unlike traditional TIPS, which have tainted perceptions due to past underperformance, this ultra-short approach restores confidence by isolating the inflation hedge.

[11:20] Ben Carlson: "We've heard from people... so this is the answer for those people, right? The people who invested in longer duration tips and got killed in 2022."

Preserving Purchasing Power in a Volatile Economy

Michael Batnik draws a comparison between holding cash in bank accounts versus investing in the new ultra-short TIPS, stressing the former's inability to preserve purchasing power amidst rising inflation.

[12:50] Michael Batnik: "When you think about a massive one time reset in prices... those other items just don't have it."

Mark Spindel further argues that traditional money market funds and cash holdings fail to protect against inflation, whereas the new product ensures that purchasing power remains intact.

[14:03] Mark Spindel: "If there was an aha moment for us, it was that 14 percentage points of purchasing power, CPI rose 14% before the coupon on your nominal T bills began to rise."

Addressing Tax complexities and User Convenience

One of the significant advantages of the ultra-short TIPS ETF is its simplicity in handling the "phantom income" issue associated with traditional TIPS, where investors owe taxes on inflation accruals without receiving actual cash flows.

[15:47] Ben Carlson: "Month to people, that phantom income."

Mark Spindel explains that the ETF structure allows for dividend distributions, simplifying tax obligations and making the product more user-friendly compared to holding individual TIPS.

[15:57] Mark Spindel: "But you owe tax on that $5."

Market Positioning and Competitive Edge

The hosts discuss how the ultra-short TIPS ETF stands out in the current economic landscape. It offers a safer, inflation-protected alternative to conventional money market funds, which often fail to keep up with inflation.

[21:30] Michael Batnik: "It's why ETFs were such a great invention for tips in general. It took this sort of complicated, hard to buy thing with bizarre tax treatments and made it simple."

Mark Spindel envisions the product as a "safe harbor" for investors amidst the rollercoaster of equity markets and fluctuating interest rates, providing a stable foundation for preserving purchasing power.

[20:23] Mark Spindel: "It's the least risky investment one can make because it's very short duration and it preserves your purchasing power."

Implementation and Accessibility

The discussion turns to the logistical challenges faced in bringing the ultra-short TIPS ETF to market. Michael Batnick and Mark Spindel detail the extensive efforts to create an investable and repeatable product, including collaboration with Bloomberg to establish a reliable index.

[23:10] Ben Carlson: "Why do people have to wait... what took so long?"

Michael Batnik explains the meticulous process of sourcing the right short-term TIPS and ensuring the ETF's seamless integration for advisors and individual investors.

[24:14] Mark Spindel: "It was just making sure that we could find them and acquire them. We believe they're cheap, they do trade cheaply."

Final Thoughts: The Future of Purchasing Power Protection

As the episode concludes, the hosts reiterate the importance of protecting purchasing power in uncertain economic times. They emphasize that the ultra-short TIPS ETF offers a straightforward, reliable solution for investors seeking to hedge against inflation without the complexities and risks of traditional TIPS.

[31:05] Michael Batnik: "It's over 7 billion across that series today."

They invite listeners to learn more about the product by visiting their website, underscoring the product's growing acceptance and the market's demand for effective inflation protection tools.

[31:18] Alex Morris: "The proof is in the pudding…"

[31:22] Michael Batnik: "Go to us treasuryetf.com to learn more about our bill."

Key Takeaways

• Problem with Traditional TIPS: Investors suffered losses in 2022 due to longer-duration TIPS exposing them to interest rate risks when rates surged, undermining the intended inflation protection.

• Solution – Ultra-Short TIPS ETF: A newly introduced ETF offering pure CPI inflation protection by investing in TIPS with maturities of less than a year, thereby minimizing duration risk and preserving purchasing power.

• Benefits Over Traditional Money Market Funds: Provides inflation-adjusted returns, simpler tax treatment by distributing dividends, and reduces the complexity associated with individual TIPS investments.

• Market Relevance: Addresses heightened inflation concerns and offers a safe harbor for preserving purchasing power in volatile economic conditions.

• Accessibility: The ETF structure ensures ease of investment for both advisors and individual investors, overcoming the logistical challenges of traditional TIPS.

For more information on the Better Money Market Fund, visit ustreasuryetf.com or email animalspiritscompoundnews.com.