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Treasury TIPS Coming Back into Fashion
Alexander Wissel, Editor in Chief, Investment U
Editor’s Note: From Bloomberg, (TIPS) are starting to look good again. For years their yield wasn’t high enough to justify the speculation, but that’s starting to change. There’s a brief excerpt from Daniel Kruger’s article below. In addition, we’ve included a brief overview on TIPS and where you can find more about them.
“At a time when central banks are attempting to prevent deflation, the hottest investments in the government bond market are securities that protect debt holders against rising consumer prices.
Inflation-linked debt from the U.S. to Japan returned 5.77 percent since November, including price gains and reinvested interest, compared with 1.55 percent for the government-bond market, according to indexes compiled by New York-based Merrill Lynch & Co.
Pacific Investment Management Co., Vanguard Group and Fifth Third Asset Management, which oversee a combined $1.8 trillion, are scooping up so-called linkers on speculation efforts by policy makers to reignite the global economy will lead to faster inflation than is currently priced into the securities. Yields on U.S. Treasury Inflation-Protected Securities, or TIPS, indicate almost no rise in consumer prices for the next decade.
“They’re breathtakingly cheap,” said Mitchell Stapley, who oversees $22 billion as chief fixed-income officer for Grand Rapids, Michigan-based Fifth Third. “This one’s going to take a while to come to fruition but I’m buying them so dirt cheap I’m willing to have a little patience.”
Last year, inflation-linked securities lagged behind the rest of the government bond market through November, losing 5 percent, as the U.S., Europe and Japan entered simultaneous recessions for the first time since World War II and commodities prices as measured by the Standard & Poor’s/Goldman Sachs Commodities Index tumbled 60 percent from their peak July 11. Treasuries returned 14 percent in 2008, the most since 1995, according to Merrill indexes.”
To read the original article, go here.
Treasury Inflation Protected Securities (TIPS)
There are two types of inflation protected securities out there issued by the government – Treasury bonds (known to bond guys as “TIPS,” an acronym for “Treasury Inflation Protected Securities”) and U.S. Government Savings Bonds (I-series). They both basically work the same. You get paid by the government in two ways.
You receive:
- A guaranteed interest rate, PLUS
- You get paid back whatever the inflation rate is each year.
With these investments, the guaranteed interest rate portion of your income is fixed. The inflation rate portion of your income changes, so the total amount of interest you’ll get paid each year will vary. If inflation is 10% in one year, you’ll get a total of 12.25% that year. However, if inflation is -5% (negative), you WON’T be penalized – you just simply won’t be compensated for any inflation, as there was none. You’ll just get your 2.25% interest, and that’s it.
Last year, Alex Green recommended readers stay away from TIPS, and for good reason. But that isn’t the case now. To find more about TIPS, the Investment U archive contains a brief overview of what they are and how they work.
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